How is interest revenue on a note receivable recorded?

• A. Record interest revenue with a debit to Interest Revenue and a credit to Cash when cash is received.
• B. Recognize interest revenue and either Debit Interest Receivable or Cash depending on accrual.
• C. Recognize interest revenue and Debit Interest Receivable; Credit Interest Revenue until cash is received; when paid, Debit Cash; Credit Interest Receivable.
• D. Record interest revenue by debiting Accounts Receivable.

Answer: (C)

Interest on a note receivable is earned over time, so it is recorded when earned, not only when cash is received. Each period you recognize the interest by debiting Interest Receivable and crediting Interest Revenue for the amount earned. This creates an asset (Interest Receivable) for the interest that is owed but not yet collected and records the revenue that has been earned. When the borrower pays, you convert that asset into cash by debiting Cash and crediting Interest Receivable. This sequence—accrue interest revenue with a receivable, then later collect cash by clearing the receivable—is exactly what option describes.