Is the interest on a note receivables recorded if paid prior to the due date?
A. Debit to interest expense
B. debit to interest payable
C. Credit to interest receivable
D. Credit interest expense
I think it's A since it's before the maturity date.
To determine the correct answer, let's understand the concept of interest on a note receivable and how it is recorded.
Interest on a note receivable is the amount of money earned by the lender (note holder) as compensation for lending the money, typically over time. The interest is based on an agreed-upon interest rate and is calculated from the date the note was issued until the date it matures.
When the borrower pays the interest prior to the due date, it is considered an early payment or prepayment of interest. In such cases, the note holder is still entitled to receive the full amount of interest as originally agreed upon, but the payment is made earlier than expected.
Now let's evaluate the given options:
A. Debit to interest expense: This option suggests debiting the interest expense, which is incorrect. Interest expense is typically recorded when it accrues, not when the payment is received. Therefore, this option is not the correct answer.
B. Debit to interest payable: This option suggests debiting the interest payable, which reflects the outstanding interest owed by the borrower. When the borrower makes an early payment of interest, it reduces the interest payable. However, this is not the correct answer as it does not consider the recording of the interest received by the lender.
C. Credit to interest receivable: This option suggests crediting the interest receivable, which is the correct answer. The interest receivable account represents the amount of interest earned by the lender but not yet received. When the borrower makes an early payment of interest, it reduces the interest receivable balance. Therefore, this option is the correct answer.
D. Credit interest expense: This option suggests crediting the interest expense, which, as discussed earlier, is incorrect. Interest expense is not recorded when the payment is received but rather when it accrues over time. Hence, this option is not the correct answer.
Based on the explanation above, the correct answer is option C: Credit to interest receivable.