When a note receivable has been discounted by a company
A) An account called discount on notes receivable is used.
B) It will be shown as an asset of the company.
C) It slows the collection process.
D) It may be shown as a contingent liability in the footnotes.

Question

Quizplus · Accepted Answer

When a company discounts a note receivable, it essentially sells the note to a financial institution before its maturity date, usually for less than its face value. This process does not slow down the collection process; instead, it accelerates the cash inflow, albeit at a reduced amount. The note is no longer shown as an asset on the company's balance sheet because the rights to receive the cash have been transferred to another entity. However, if there is a possibility that the company might have to repay the amount to the financial institution (for example, if the debtor fails to pay the note at maturity), this potential obligation is disclosed as a contingent liability in the footnotes of the financial statements. There is no specific account called "discount on notes receivable" used in this context; instead, the discount represents the interest expense or finance charge for obtaining early cash from the note.

When a Note Receivable Has Been Discounted by a Company