When a firm has a customer that has not paid its account receivable and negotiates that the customer will submit an interest-bearing note in payment of the account receivable, then it will receive the interest and the principal amount will be classified as bad debts.
An interest bearing note is defined as a loan from a lender to a recipient or a borrower that bears interest as per the terms of the arrangement with both the parties.
Therefore, In the given case, the company received the interest bearing note by the customer that he will pay the interest amount for the amount that he received from the company, but the principal amount will be called as the bad debts.
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