Interest vs. Non Interest Bearing Notes Receivable (Intermediate Financial Accounting I #9)

What is the difference between interest and non-interest bearing notes? Learn the characteristics of both and follow an example that looks at a notes receivable asset. We will record and amortize notes receivable in the next tutorial!
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[@pedrotacolover]

Amazing, I think you explained with 5 words what my textbook confused me with 4 pages.

[@thePanda_huma]

Thank you so much. This helped me a lot

[@devilstyle1161]

Amazing and simple explanation

[@user-rx8qq8sk9ydv1ce5ib]

Thanks for the video. What is the GAAP / ASC deal with that.

[@danielbarnett3582]

Great Vid, thanks

I just got some question. When should we use non-interest bearing note and interest bearing note? Which is efficient? Or does it depends upon the situation or the payee? 😁 I'm really confused since I'm just new Accounting.

[@NotepirateDave]

The accounting is dependent on the substance of the note. If it pays interest periodically then you would account for it as a interest bearing note. If it is a zero interest note then you would account for it as a non-interest bearing note. Just look at the note to see if interest payments are made to the note holder periodically.

@@NotepirateDave thank you! 😯

[@hannahpark1915]

Why would any company give a loan with a interest rate lower than its market rate? And why is discounting called int. revenue when its a loss?

[@sambalewasupsup3667]

Well I think lower interest rate would be easier to the debtor to pay the loan right ?

[@paulhan7770]

You need to visualize the situation. The lender wants to maximize the profit by earning the highest interest payments he or she can get. The problem is that the borrower can look for other loans that have lower interest rate so both parties have conflicting views. Lets say the lender charges 5% for 1000 loan but other lenders charge 7% (market interest rate). The borrower definitely wants that 5 % but the lender is aware that the other loan charges 7% , the lender would tell the borrower that he or she would only pay the borrower less than 1000 upfront since the borrower is receiving the favorable interest rate. This is what it is called selling a note at a discount. Interest payment: 1000×5% = 5 this is the interest cash payment 1000×7%= 7 this is the interest Revenue the difference is 2 and this is the discount on notes. This discount will eventually become interest Revenue as time passes It is not a LOSS since the end RESULT is the same for both situations.

[@jennifercontreras9048]

Can you add captions next time?

[@jennifercontreras9048]

Notepirate It says captions are not available for this video