Which statement about a note receivable is true?

Which statement about a note receivable is true?

• A. It arises from credit sales and typically carries no stated interest.
• B. It arises from cash receipts with no interest.
• C. It is a short-term asset that always carries no interest.
• D. It is a written promise with interest terms; accounts receivable arise from credit sales and typically have no stated interest.

Answer: (D)

Notes receivable are formal written promises to pay a specific amount by a certain date, and they usually include interest terms. This distinguishes them from accounts receivable, which arise from selling goods or services on credit and typically do not have a stated interest rate. Because a note carries a written promise and often a set interest rate, it is recorded as a notes receivable and interest income is recognized over time. The statement that a note is a written promise with interest terms, while accounts receivable arise from credit sales and typically have no stated interest, correctly captures the main difference between these two types of receivables. The other options are off because notes are not created from cash receipts, and notes can be short-term or long-term and do not have to carry no interest—interest terms are a common feature.

Notes receivable are formal written promises to pay a specific amount by a certain date, and they usually include interest terms. This distinguishes them from accounts receivable, which arise from selling goods or services on credit and typically do not have a stated interest rate. Because a note carries a written promise and often a set interest rate, it is recorded as a notes receivable and interest income is recognized over time. The statement that a note is a written promise with interest terms, while accounts receivable arise from credit sales and typically have no stated interest, correctly captures the main difference between these two types of receivables. The other options are off because notes are not created from cash receipts, and notes can be short-term or long-term and do not have to carry no interest—interest terms are a common feature.