How do you calculate interest on a note receivable?

To calculate interest on a note receivable, the correct method involves multiplying the principal amount of the note by the interest rate and the fraction of the year that the note is outstanding. This formula reflects the basic principle of interest calculation, which is based on the amount of money loaned (principal), the cost of borrowing that money (interest rate), and the time the money is borrowed for (time).

Using this method ensures that you account for the time value of money appropriately. For instance, if the note is for a period of less than a year, the fraction of the year allows for an accurate calculation of interest that corresponds to the actual time the money was loaned out.

This approach clearly captures each component necessary for determining the interest accrued and is the widely accepted practice in finance and accounting for calculating interest on receivables.