where 
example of unearned discountsnuffy s bank and trust have made a loan to ernie s brokerage as part of the up front costs of the loan ernie was required to pay a financing charge of 6 of the total loan amount the total loan amount is 10 000 and will be repaid over 5 years in monthly installments the amount of the finance charge paid up front by ernie was 600 initially snuffy s bank and trust record the 600 unearned discount as a liability on its books as ernie pays each of the 60 loan payments 12 per year for 5 years 1 60th of the 600 will be removed from the liability side of the balance sheet and recognized as income 