Discount on notes payable definition
/What is a Discount on Notes Payable?
A discount on notes payable arises when the amount paid for a note by investors is less than its face value. The difference between the two values is the amount of the discount. The size of this discount is especially large when the stated interest rate on a note is well below the market rate of interest.
Accounting for a Discount on Notes Payable
The difference between the face value of a note and the amount paid for it is recorded in a Discount on Notes Payable account. This is classified as a contra liability account; as such, it is paired with and offsets the Notes Payable account. The amount in the Discount on Notes Payable account is gradually amortized over the remaining life of the note, so that the difference is eliminated as of the maturity date.
Example of a Discount on Notes Payable
A business issues a note with a face value of $100,000, for which a lender pays it $90,000. The discount on this note is $10,000. The borrower records this transaction with the following entry:
