Textbook Problem

Does a discounted note payable provide credit without interest? Discuss.

To determine

Short-term notes payable: Short-termnotes payable is a written promise made by the business to pay a certain amount on a future date, with certain percentage of interest within a year. It is generally issue by the company to meet its short-term financing needs.

To discuss: Whether discounted notes payable provide credit without interest.

Answer to Problem 1DQ

A discounted notes payable does not provide credit without interest.

Explanation of Solution

A discounted note payable contains no stated interest rate. But, it provides interest through discounting the note proceeds. The discount amount which is the difference between the note proceeds and the face value of note, is generally accounted as interest.