Which of the following statements regarding the recording of interest on notes receivable is true?
A) Interest on notes receivable is recorded as revenue only when the cash is received.
B) When a company receives an interest payment on a note, the entire payment is recorded as revenue when received.
C) Interest on notes receivable is recognized when it is earned which is not necessarily when the interest is received in cash.
D) Interest earned but not yet received must be recorded in an adjusting entry which includes a debit to interest

Question

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Interest on notes receivable is recognized as revenue when it is earned, which is not necessarily when the interest is received in cash. This means that even if the company has not yet received the cash interest payment, it should still record the interest earned as revenue and recognize the corresponding interest receivable or accrued interest. Option A is incorrect because interest on notes receivable should be recognized as revenue when it is earned, not only when cash is received. Option B is incorrect because only the portion of the interest payment that corresponds to the interest earned should be recorded as revenue when received, while the remaining amount should be recorded as a reduction of the note receivable. Option D is incorrect because interest earned but not yet received should be recorded in an adjusting entry, but the adjusting entry should include a credit to interest receivable or accrued interest, not a debit.

Which of the Following Statements Regarding the Recording of Interest