Noninterest-Bearing Notes Receivable: A Simple Guide

A noninterest-bearing note receivable is a written promise to pay a fixed amount later with no stated interest rate. Under U.S. GAAP, the holder generally records it at present value rather than face value, subject to the short-term exceptions explained below. The difference, called the discount, becomes interest revenue over the note’s life using the effective-interest method.

You may also see this called a zero-interest-bearing note or a non-interest-bearing note. Present value is what a future payment is worth today. The key is to separate the amount financed from the reward for waiting. This lesson explains implicit and imputed rates and notes received for assets or services. All examples are hypothetical and leave out fees and credit losses so you can focus on the interest calculation. Periods are annual unless otherwise stated.

Quick example: You lend $12,000 today and will collect $14,520 in two years. Record a $2,520 discount at the start. Then recognize $1,200 of interest revenue in Year 1 and $1,320 in Year 2.

Why Does a Noninterest-Bearing Note Earn Interest?

“Noninterest-bearing” describes the stated terms, not necessarily the economic return. A borrower who receives $12,000 today and repays $14,520 in two years has paid for the use of money, even if the document lists no separate annual interest.

The lender puts $12,000 into this note on day one. The $2,520 difference is the discount, and it becomes interest revenue over two years. It is not an immediate loss and is not a separate liability. For the foundation, review notes receivable recognition and journal entries.

Interest-bearing vs. noninterest-bearing notes

The comparison below assumes principal is due in one payment at maturity, a positive market rate, and no short-term exception.

How Do You Find the Present Value and Implicit Rate?

For one payment at maturity, present value equals future cash divided by the compound-interest factor:

For the hypothetical $14,520 note, the initial $12,000 investment implies a 10% annual yield: $12,000 × 1.10 × 1.10 = $14,520. Equivalently, the square root of ($14,520 ÷ $12,000), minus 1, equals 10%.

An implicit rate comes from amounts you already know, like the cash given today and the cash due later. An imputed rate is an estimate based on market evidence, used when you don’t have reliable transaction values. Either way, once you have the rate, the accounting works the same.

What Are the Journal Entries for a Noninterest-Bearing Note?

Here is the lender’s entry at the start of the note:

The discount is a contra asset, which means it reduces another asset. Here it brings the $14,520 face amount down to the $12,000 present value.

Carrying amount means face amount minus the unamortized discount. The effective rate is the note’s true yield. Interest revenue equals the beginning carrying amount multiplied by the effective rate. With no interim cash payments, all interest revenue increases the carrying amount.

Each year-end, move part of the discount into interest revenue:

Debiting the discount reduces its credit balance, which raises the note’s carrying amount.

At maturity, debit Cash $14,520 and credit Notes Receivable $14,520. The $2,520 financing return has already been recognized over time, so collection does not create another $2,520 of revenue.

How does the note look on the balance sheet? At the end of Year 1, show the $14,520 face amount, less the $1,320 unamortized discount, for a $13,200 carrying amount. The discount is deducted directly from the note, not shown as a separate liability. The note’s description includes the effective rate, and the face amount is disclosed. Because the note is due within the next year at that date, it would normally be a current asset.

What if the note starts mid-year? Accrue interest only for the period the note was outstanding. Assume a note is issued on October 1 with an initial carrying amount of $12,000 and a 10% annual effective rate. Using monthly proration, the December 31 year-end entry records three months of interest: $12,000 × 10% × 3/12 = $300.

Using straight-line amortization would produce $1,260 each year, which does not give the constant 10% yield shown here. GAAP requires the effective-interest method, also called the interest method. Another method, such as straight-line, is allowed only when the results are not materially different (ASC 835-30-35-2 and 35-4). For notes with periodic cash interest, compare the discount and premium amortization examples.

How Do You Record a Note Received for Property, Goods, or Services?

When a note is exchanged for something other than cash, examine whether its stated terms reasonably represent the transaction. A missing or unreasonable stated rate, or a material difference between face amount and the cash selling price, indicates that the face amount may not be the appropriate initial measurement.

Start by asking who is on the other side of the sale, because that decides which standard sets the initial amount.

Customers: ASC 606 applies when you sell goods or services in your ordinary business. If the payment timing gives the customer a significant financing benefit, adjust the promised amount for the time value of money. Use the discount rate you would see in a separate financing deal with that customer at contract inception. That rate often equals the rate that discounts the promised payments to the cash selling price, but check that it fits the customer’s credit.

Noncustomers: A sale of land or equipment outside your ordinary business falls under ASC 610-20, which applies ASC 606’s measurement guidance, including the financing adjustment.

Other notes: ASC 835-30 records the note at the fair value of the property, goods, or services or the fair value of the note, whichever is more clearly determinable. If neither is available, discount the payments at an imputed rate based on comparable instruments and the borrower’s credit, collateral, restrictions, and payment pattern.

In each case, pick the rate at inception and do not reset it when market rates change later. For customer contracts, ASC 606 points back to ASC 835-30 for presenting the discount and applying the interest method.

Example: a note received for land

Harbor Company sells land with a carrying amount of $13,000 and a reliable fair value of $18,000. It accepts a two-year note requiring one $21,780 payment and no stated interest. Assume Harbor does not sell land in its ordinary business, the sale qualifies for recognition, the note is fully collectible, and the implied rate fits what a separate loan to this buyer would charge.

The sale gain is $18,000 − $13,000 = $5,000. The $3,780 difference between face value and fair value is future interest, not additional gain on the land. The implicit annual yield is 10% because $18,000 × 1.10 × 1.10 = $21,780.

Example: no reliable cash price, so use a market rate

Ridgeway Company sells used equipment with a carrying amount of $16,000. The equipment has no reliable cash price, and the note has no ready market. The buyer signs a two-year note for one $23,328 payment with no stated interest. Assume Ridgeway does not sell equipment in its ordinary business, the sale qualifies for recognition, and 8% is the rate a separate loan to this buyer would carry.

Present value: $23,328 ÷ 1.08 ÷ 1.08 = $20,000. Discount: $23,328 − $20,000 = $3,328. Gain: $20,000 − $16,000 = $4,000.

Interest revenue is $1,600 in Year 1 ($20,000 × 8%) and $1,728 in Year 2 ($21,600 × 8%), which totals the $3,328 discount.

Exam tip: If a question gives a rounded present value factor, use it as given. The factor 0.8573 gives $19,999 here, which is a rounding difference, not an error.

What Changes When the Note Has Installments?

Discount each payment according to when it will arrive. Equal end-of-year payments form an ordinary annuity; they are not a single maturity payment.

Hypothetical service example: A company finishes a service for a customer. The customer pays $4,000 immediately and signs a noninterest-bearing note promising $6,000 at the end of each of the next two years. Assume 10% is the rate for a separate financing deal with this customer and that the services qualify for revenue recognition now under ASC 606. The deferred payments have a present value of $10,413.22: $6,000/1.10 + $6,000/1.21. Initial service revenue is $14,413.22, including the down payment. Interest is reported separately from revenue from contracts with customers.

Entry at the start of the note:

The final interest amount includes a one-cent rounding adjustment. Each payment includes a return on the outstanding investment and recovery of that investment. Unlike the single-payment example, the carrying amount falls as installments are collected. With a face-value-and-discount ledger, record each $6,000 cash receipt against Notes Receivable and separately amortize the discount to interest revenue.

Common Mistakes to Avoid

Booking the face amount as the sale price. In the Harbor example, the gain is $5,000, not $8,780. The extra $3,780 is future interest.

Applying the rate to the face amount. Year 1 interest on the $14,520 note is $1,200, not $1,452, because you start from the $12,000 carrying amount.

Using the original amount in Year 2. Year 2 interest is 10% of $13,200, which is $1,320, not $1,200.

Waiting until maturity to record interest. Interest revenue is earned as time passes, even when no cash arrives until the end.

Mixing up the discount and the allowance. The discount is future interest. The allowance for credit losses is a separate estimate of what may not be collected.

Where Does This Show Up on the CPA Exam?

The AICPA’s 2026 FAR Blueprint does not list notes receivable as its own topic. It does list trade receivables, financial assets at amortized cost, notes and bonds payable, and revenue recognition. The present value and effective-interest steps on this page support tasks like calculating interest on notes payable with discounts. The Blueprint’s tasks are representative, not a complete list of what can be tested.

For more FAR practice, try the CPA Test Bank.

Practice Questions and Explanations

1. Identify the discount

A lender advances $8,000 for a noninterest-bearing note due at $9,680 in two years. What discount is recorded initially?

2. Calculate the second year

The same note has a 10% effective annual yield. What is Year 2 interest revenue?

3. Separate sale gain from financing

Land costing $7,000 has a reliable cash selling price of $10,000. The seller accepts a qualifying two-year note for $12,100 with no stated rate. What is the sale gain?

Key Takeaways

• A noninterest-bearing note has no stated interest rate, but it still earns interest.
• Record the note at present value, not face value, unless a short-term exception applies.
• The discount is face amount minus present value, and it reduces the note on the balance sheet.
• Interest revenue equals the beginning carrying amount times the effective rate.
• Gain or revenue from a sale is based on present value. The rest is interest earned over time.

Frequently Asked Questions

Is the discount on a note receivable a credit-loss allowance?

No. The discount is future interest built into the note, and it reduces the face amount until it is earned. Expected credit losses are estimated separately under ASC 326-20.

Do you record interest revenue if no cash interest is received?

Yes. Interest revenue is earned as time passes, even if all the cash arrives at maturity. Each period, debit Discount on Notes Receivable and credit Interest Revenue.

Should short-term customer invoices or notes be discounted?

Usually not. ASC 835-30 excludes normal trade receivables due on customary terms within about one year. ASC 606-10-32-18 also permits a company to omit the financing adjustment if, at contract inception, it expects no more than one year between transferring the promised goods or services and receiving the related payment.

Can you use straight-line amortization for a note discount?

Only if the results are not materially different from the effective-interest method, under ASC 835-30-35-4. In the $14,520 example, straight-line gives $1,260 a year, while the effective-interest method gives $1,200 and then $1,320.

Is this the same as imputed interest for tax?

No. This page covers financial accounting under U.S. GAAP. Tax rules for below-market loans and unstated interest are separate, such as IRC sections 7872, 483, and 1274, and they generally use IRS applicable federal rates.

Accounting References

See FASB ASC 835-30 for imputation of interest and the interest method. See ASC 606-10-32-15 through 32-20 for financing components in contracts with customers, ASC 610-20 for sales of nonfinancial assets to noncustomers, and ASC 326-20 for credit losses on assets at amortized cost. FASB Accounting Standards Update 2015-03 reproduces ASC 835-30-45-1A and 45-3: a note discount is a direct deduction from the note’s face amount, and its amortization is interest income for the holder. The current Codification is the authoritative source.

Last reviewed: November 2026.

For more worked examples and practice, explore the Intermediate Accounting course.

About the Author

Mansour Farhat, CPA, CIA, DBA, is an accounting educator and the founder of Farhat Lectures. He earned his DBA from Temple University and his Master of Accountancy from Bloomsburg University. He helps learners from their first accounting course through the CPA, CMA, and EA exams.