When a notes receivable is discounted, the business that endorses the note becomes potentially liable to the bank. This liability is called a
A) potential liability.
B) dependent liability.
C) conditional liability.
D) contingent liability.

Question

Quizplus · Accepted Answer

Discounting a notes receivable means that the business endorses the note and sells it to a bank at a discounted price. The bank then assumes the right to collect the full amount of the note from the borrower. However, if the borrower defaults on the note, the bank can look to the business for payment. This potential obligation of the business is known as a contingent liability.

When a Notes Receivable Is Discounted, the Business That Endorses