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A business lends money to a customer under a short-term loan contract that states a principal, an annual interest rate, and a term in days. In which account does the lender record the amount owed to it?
ANote receivable
BInterest revenue
CAllowance for receivables
DIrrecoverable debts expense
Answer & Solution
Correct answer: A. Note receivable
1. A loan contract stating principal, an annual rate and a term is a note receivable.
2. It is a current asset recording the amount the borrower owes the business.
3. Interest revenue records interest earned, not the loan itself, so it is wrong.
4. The allowance and irrecoverable debts accounts relate to bad debts, not loans, so they are wrong.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.3 "Note Receivable", p.133_
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