 Hello and welcome to this session. This is Professor Farhad in which we would look at a notes receivable that is discounted at the bank This questions give many students an issue because you need to understand how this counting work And yet if you don't have a good understanding of the time value of money or of or of basic discounting You will find this problem quite challenging on four hat lectures.com. This is what I do I help students understand the concept. I teach you the concept on four hat lectures.com in contrast to a CPA prep companies like Becker, Roger, Wiley, Glyme They do review them with you. They do a great job, but they don't teach you the material if you have the need of Understanding the basic and I believe that's the key to success on the CPA exam because most CPA questions If not all CPA questions, you can eliminate two choices You can go down to 50-50 if you have a basic understanding of the material and I'm going to show you in this session How you could eliminate two choices immediately. That's what I always do when I go over a question So let's go ahead and take a look at this first question Skylar W received a cost from a customer one year 400,000 note bearing an annual interest rate of 10% so Skylar either Lend money to a customer or they made a sale and now they receive the note It's a one-year note after holding the note for six months Skylar discounted the note at the first Republic Bank at an effective interest rate of 13% The question is how much cash that Skylar received from the bank now I could ask you five different questions about this information Let's visualize what just happened. Here's what happened Skylar made the sale. Let's assume it's a sale. So Skylar debited notes. I'm gonna go through the whole thing in detail notes receivable 100,000 and Credited sales and I'm gonna ignore cost of goods sold 100,000. So here they receive the notes receivable and This notes receivable will pay 10% so if a Skylar waits one full year Skylar would receive the 400 plus that I'm sorry. This is 400 not 100 400 So if Skylar waits one full year, she would receive 440,000 from the bank simply put the 400,000 Notes receivable would earn 1.1 which will be equal to 400,000. Why 1.1? It's one for the original principal plus 10% for the interest you would receive 410,000 obviously Skylar could not wait Skylar wanted to get the money Sooner so six months later someplace here Skylar went to the bank. They visited the bank and they told the bank look we need money We have this note. You can collect the note, but we need some money now The bank wants to earn interest as well. The bank wants to earn 13% interest on whatever money they give you Good now let's look at the answer choices and try to eliminate two choices immediately if you understand the question if you understand Basically, what I just told you if you understand what you are giving Immediately you could eliminate a why could you eliminate a because if Skylar waited one full year Skylar will get 440,000 while Skylar did not wait for one full year. Therefore a is not an option Also, we could eliminate C. Why can we eliminate C? Well, think about it You have a note that's worth 400,000 and you held this note for six months Well, guess what this note it's gonna earn some interest. So when you sell it, you're not gonna sell it for less than 400,000 You held it for you held it for six months and the face value of it is 400,000. It's gonna earn more It's gonna earn $40,000 more So you're not gonna sell it less than 400,000 logically you could eliminate C So notice what happened now you're down to 50-50 if you're under time pressure Go ahead and select one of these two answers. At least you have a 50% chance get in the question, right? But you don't do that. We're gonna work this problem. Now you went to the bank the bank said, okay, no problem I'll give you money. However, I want to earn the bank wants to earn 13% on whatever money they gave you now put yourself in the shoes of the bank the bank is saying Six months from this date The bank would receive 440,000 assuming the customer honors the note which we're gonna assume that's the case honors means the customer does pay the note Plus the interest. So the bank would say, okay, let me think about it. If it's 440,000 I want to earn 13% on this note. So let's perform the computation and see how much interest would I need to earn to earn 14% So I'm gonna I'm gonna get 440,000 times 1.3 440,000 times 1.3 that's 57,200 now be careful Be careful here is this is not for a full year. This is for a half a year I multiply this by 0.5 or one half therefore the bank wants to earn 28,000 28,600 so be careful when I get the first answer which was double this Double this well, the bank can't earn that much if the bank will wants to earn, you know The full 13,000 for for the full year then yes, the number will be less than 400,000 then C will be an option But you have to be careful. They're gonna be only waiting. They're all the bank is only waiting for Six months. Let me make it in a different color. The bank is only waiting for this much So the bank only waiting for six months That's why you have to multiply the answer 440 times 13% times one half or point five the banks gonna say, okay, I'm gonna give you instead of giving you 440,000 I'm gonna give you let me pull back the calculator 440,000 Minus 28,600 so I will give you 411,400 and this is what the bank would give you D Which is what the bank is saying I want to earn 28,600 for this period for this period for this period here. I want to earn 28,600 Oh, okay. Let's confer. Let's let's kind of do a little bit more of computation I can ask you to how much did Skyler earn an interest. Well, how much did Skyler earn an interest? Well, if Skyler is gonna be receiving 411,400 so Skyler earned 11,400 in interest. I could also ask you what is the rate of the return of Skyler's on this note. What's the rate of return? Well, Skyler earned 11,400 on a note that's worth 400 and 40,000 that's the face value of the note. This is how much you would receive later. Let's do this So 11,400 divided by 440,000 That's equal oops. Let's redo this again not multiply 11,400 divided by 440,000 That's 2.5 percent. That's for that's for That's for a for a full year. Remember 2.5 percent. This is if you waited the full year 2.5 percent times two Skyler earned 5.18. So Skyler earned 5.18 percent Let's see. Can we find out how much did the bank earn? Let's do let's confirm the bank as well. The bank earned 28,000 2600 28,600 divided by 440,000 That's six point five, but that's only for six months to annualize the rate multiply by two in the bank earned 13 percent That's exactly what the bank wanted to earn. This is I'm just confirming the numbers. So I could ask you how much did Skyler earned 5.18 on this note although initially if they if they held if they held the note until it matured They would have they would have earned 10 percent. Well, they could not because they needed the money They are therefore because they needed the money the bank said, okay I will buy the note, but I will discount it based on 13 percent. So simply put the 440,000 That was earned in total from this note. Okay, let's let me break it for you 11,400 went to Skyler and 28,600 Went to the bank which made it a 13 percent return which made it 5.18 percent The reason I did this because they could ask you the question in too many different ways They could also ask you how much that Skyler received in actual interest. Well, the answer is 11,400 so that's how much interest that Skyler received I could also ask you to do the journal entries about this I'm not gonna go into this but the point is, you know, you I could ask so many different Questions, so the key is to remember you have to understand everything if you don't understand the material They can throw you off. So that's why forehead lectures calm will help you learn the material your CPA exam is a lifetime investment Don't short change yourself You are investing for your next 20 to 30 years of your career And by the way, if you haven't connected with me on LinkedIn, please do so subscribe to my YouTube at least what I have A lot of lectures that could help you that could help you understand the material But farhat lectures calm is the place to go to really pass to add 10 to 15 points To your CPA exam put it behind you focus on your career. Good luck in study