What is the formula for interest revenue on a note receivable?

What is the formula for interest revenue on a note receivable?

• A. Principal × Time
• B. Principal ÷ Time × Interest rate
• C. Rate × Time
• D. Principal × Rate × Time

Answer: (D)

When calculating interest on a note receivable, you use simple interest, which multiplies the amount lent (principal) by the interest rate and by the time the funds are outstanding. This reflects that interest earned grows in proportion to how much is lent, how high the rate is, and how long the money is tied up. Therefore, the formula is Principal × Rate × Time. If the rate is annual, make sure the time is in years (or adjust the time units accordingly, with the rate matching those units). For example, $1,000 at 6% for 2 years earns $1,000 × 0.06 × 2 = $120 in interest. The other forms fail because they omit one of the essential factors: the first misses the rate, the second mixes in division by time, and the third omits principal.

When calculating interest on a note receivable, you use simple interest, which multiplies the amount lent (principal) by the interest rate and by the time the funds are outstanding. This reflects that interest earned grows in proportion to how much is lent, how high the rate is, and how long the money is tied up.

Therefore, the formula is Principal × Rate × Time. If the rate is annual, make sure the time is in years (or adjust the time units accordingly, with the rate matching those units). For example, $1,000 at 6% for 2 years earns $1,000 × 0.06 × 2 = $120 in interest.

The other forms fail because they omit one of the essential factors: the first misses the rate, the second mixes in division by time, and the third omits principal.