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Which of the following statements about the recording of interest on notes receivable is correct?

a. Interest on notes receivable is recorded as revenue only when the cash is received
b. When a company makes on interest payment on a note, the payment-is debited to Interest Receivables.
c. Interest on notes receivable is recognized when it is earned, which is not necessarily when the interest is received in cash.
d. Interest earned but not yet received must be recorded in an adjusting entry which include the debit to interest revenue.

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Answer:

c. Interest on notes receivable is recognized when it is earned, which is not necessarily when the interest is received in cash.

Explanation:

Accrual principle of accounting is applied when it comes to recording of interest on notes receivable.

Accrual principle states that revenue or expense is recognized when it incurs or occurs not when it is paid or received.

Thus, Interest on notes receivable is recognized when it is earned, which is not necessarily when the interest is received in cash.

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