What is the formula to calculate accrued interest on a notes receivable?

What is the formula to calculate accrued interest on a notes receivable?

• A. amount × rate × (months/12)
• B. amount × rate × months
• C. Principal × rate × 12
• D. Interest income minus principal

Answer: (A)

Accrued interest on a notes receivable is calculated using simple interest and prorated for the time the note has been outstanding. You take the principal, multiply by the annual interest rate, and then multiply by the portion of the year the note has been outstanding. When time is given in months, that portion is months/12. So the correct formula is amount × rate × (months/12). For example, $10,000 at 6% for 3 months yields 10,000 × 0.06 × 3/12 = 150, which makes sense as the interest earned in a three-month period. If the note runs for a full year, it becomes 10,000 × 0.06 × 1 = 600. The other expressions don’t fit because they either skip prorating for part of the year, improperly scale time, or mix up what’s being calculated (such as subtracting principal from interest income).

Accrued interest on a notes receivable is calculated using simple interest and prorated for the time the note has been outstanding. You take the principal, multiply by the annual interest rate, and then multiply by the portion of the year the note has been outstanding. When time is given in months, that portion is months/12. So the correct formula is amount × rate × (months/12). For example, $10,000 at 6% for 3 months yields 10,000 × 0.06 × 3/12 = 150, which makes sense as the interest earned in a three-month period. If the note runs for a full year, it becomes 10,000 × 0.06 × 1 = 600.

The other expressions don’t fit because they either skip prorating for part of the year, improperly scale time, or mix up what’s being calculated (such as subtracting principal from interest income).