On January 7, 2021, Dang Company discounted its own P100,000, 180-day note at the Bank of the Philippine Islands at a discount rate of 20%

Accounting May 21, 2021

On January 7, 2021, Dang Company discounted its own P100,000, 180-day note at the Bank of the Philippine Islands at a discount rate of 20%. Dang repaid the note on the July 6, 2021, its due date. Based on a 360-day year, what was the effective rate of interest on the borrowing? (Omit percentage e.g. if 30% on worksheet, answer is 30 in this form.) *

Expert Solution

Computation of Effective Rate of Interest on Borrowings:

Effective Rate of Interest on Borrowings = Simple Interest/(Discounted Value*Time)

Here,

Simple Interest on Note = Principal * Rate * Time

= P100,000 * 20% * 180/360

Simple Interest = P10,000

Discounted Value of Note = P100,000 - P10,000 = P90,000

Effective Rate of Interest = P10,000 / (P90,000 * 180/360)

=P10,000 / P45,000

= 2/9 * 100%

Effective Rate of Interest = 22.22 %

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