Q20RQ - Horngren'S Financial And Managerial Accounting

Question

What is the formula to compute interest on a note receivable?

Step-by-Step Solution

Answer

Interest is computed by multiplying notes receivable value with interest rate and time period.

Step 1: Explanation on Note receivable

Notes receivables represents a written promise that gives the holder or bearer the right to receive an amount (Fixed Plus Interest) on maturity date as outlined in an agreement or note. Notes receivable are also called as “Promissory Note”.

Step 2:Formula for interest computation

The formula for computing the interest in notes receivable is as follows:

 $AmountofInterest=Principle\left(orNotesreceivablevalue\right)xInterestRatexTimePeriod$ Where, 

Principle = The amount loaned by the payee and borrowed by the maker of the note.

Interest = It is Percentage as specified on the note. Interest rates arealways stated on yearly basis.

Period = Period of the Time during which interest is computed.