If an interest-bearing note payable is issued at a discount, then the contractual cash payment for interest is
A)less than interest expense.
B)greater than interest expense.
C)equal to interest expense.
D)ignored since no interest payment will be made.

Question

Quizplus · Accepted Answer

When an interest-bearing note payable is issued at a discount, the contractual cash payment for interest is less than interest expense because the discount represents interest expense that is amortized over the life of the note. Therefore, the effective interest rate (which is used to calculate interest expense) is higher than the stated interest rate (which is used to calculate the contractual cash payment for interest).

If an Interest-Bearing Note Payable Is Issued at a Discount