Practice Quiz

CFP Certified Financial Planner Test Prep

Category - Accounting

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If the accrual basis of accounting is used, when is the discount on a note receivable reported as interest revenue?
  1. t is reported over the life of the note.
  2. It is reported when the note reaches the maturity date.
  3. It is reported when the note is received.
  4. It is not reported.
  5. It is reported daily.
Explanation
Answer - A - Under the accrual basis of accounting, the discount on a note receivable is reported over the life of the note.

Key Takeaway: Notes can be converted to cash by selling them at a discount. The discount rate is the percentage rate that is charged for buying the note and collecting the debt. If the accrual basis of accounting is used, this revenue should be recognized as it is earned, that is over the life of the note.
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