Question

Which of the following is not true about the discount on short-term notes payable?

A. The Discount on Notes Payable account is a contra liability and has a debit balance.
B. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
C. When there is a discount on a note payable, the effective interest rate is higher than the stated interest rate.
D. The amortization of Discount on Notes Payable increases interest expense.

Answer 1

The Discount on Notes Payable account should be reported as an asset on the balance sheet.

Step-by-step explanation:

The correct answer is B. The Discount on Notes Payable account should be reported as an asset on the balance sheet. The Discount on Notes Payable account is a contra liability account, which means it reduces the amount of the liability it is associated with. Since liabilities are typically reported under the liabilities section of the balance sheet, the Discount on Notes Payable account is reported as a deduction from the related Notes Payable account.

For example, if a company issued a $10,000 note payable with a discount of $500, the note payable liability would be reported as $9,500 and the Discount on Notes Payable account would be reported as an asset with a balance of $500.

The increase in Discount on Notes Payable decreases the interest expense over time. As the discount is amortized (allocated) over the life of the note, the amount of discount decreases, resulting in lower interest expense.