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Amortization of a Discount on Notes Receivable results in receiving less in Cash interest payments than...

Amortization of a Discount on Notes Receivable results in receiving less in Cash interest payments than earned Interest Revenue True or False

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Answer #1

Notes are issued on discount only when cash interest on notes are less than market rate of interest. It means that market is providing higher interest than notes. Discount on notes are credited when notes are purchased and discount on notes are debited when interest is received from notes.

Journal entry for interest on notes received:

Cash Interest Debit

Discount on interest Debit

Interest Revenue Credit

From the above journal entry, it is clearly depicted that :

Interest revenue = Cash interest + Discount on interest

So, Cash interest payment is less that interest revenue because interest revenue comprises of cash interest as well as discount on interest.

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