Discount on notes receivable definition
/What is a Discount on Notes Receivable?
A discount on notes receivable arises when the present value of the payments to be received from a note are less than its face amount. The difference between the two values is the amount of the discount. The discount serves as compensation for the risk of waiting for payment, essentially reducing the note's current worth.
Accounting for a Discount on Notes Receivable
To account for the difference between the present value of the payments to be received from a note and its face amount, amortize it over the remaining life of the note. The offset to this entry goes to interest revenue. For the party discounting the note, the discount is incrementally recognized as interest expense over the remaining term of the note.