A company sold land and accepted a five-year note having a maturity value of $40,000 with no stated interest rate. The land originally cost the company $75,000. At the date of sale, the land had a fair value of $30,000. What is the amount of the discount when recording the sale?

Rationale

The amount of the discount when recording the sale is $10,000.

To determine the discount, we compare the maturity value of the note with the fair value of the land at the time of sale. The note's maturity value is $40,000, while the fair value of the land is $30,000, leading to a discount of $10,000 which reflects the difference between these two amounts.

A ($10,000) CORRECT

This choice accurately represents the discount calculated by subtracting the fair value of the land ($30,000) from the maturity value of the note ($40,000). The resulting difference is indeed $10,000, indicating the reduction in value at which the land was sold compared to the expected maturity value of the note.

B ($15,000) YOUR ANSWER

This option incorrectly suggests a discount of $15,000. This figure does not align with the fair value and maturity value given in the problem. The correct calculation is the difference between the maturity value of $40,000 and the fair value of $30,000, which results in a $10,000 discount, not $15,000.

C ($30,000) YOUR ANSWER

Choosing $30,000 as the discount reflects a misunderstanding of the terms. This amount equals the fair value of the land, not the discount. The discount should be based on the difference between the maturity value of the note and the fair value of the land, which is $10,000.

D ($5,000) YOUR ANSWER

This option is also incorrect, as it suggests a much smaller discount than what is calculated. The discount is determined by the difference between the land's fair value and the note's maturity value, yielding $10,000, not $5,000.

Conclusion

In summary, the correct discount amount when recording the sale is $10,000, derived from the difference between the maturity value of the note and the fair value of the land. Incorrect choices either misinterpret the values or do not adhere to the correct calculation principles, reaffirming the proper understanding of how discounts are recorded in such transactions.

A company sold land and accepted a five-year note having a maturity value of $40,000 with no stated interest rate. The land originally cost the company $75,000. At the date of sale, the land had a fair value of $30,000. What is the amount of the discount when recording the sale?

The amount of the discount when recording the sale is $10,000.

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