Interest on Receivables and Payables
APB Opinion 21, August 1971
“Interest on Receivables and Payables”
“Interest on Receivables and Payables”
Note exchanged for cash
1. Present value of the note = cash proceeds exchanged
2. If present value of the note < face amount of the note
–> the difference is discount
–> discount is amortized using “interest method”
–> the difference is discount
–> discount is amortized using “interest method”
3. Amortization of discount
–> interest expense for note payable
–> interest income for note receivable
–> interest expense for note payable
–> interest income for note receivable
Example 1: Note payable
Received 1,000 in cash and issued a1,100 note payable
Present value = 1,000
Face amount =1,100
Discount on note payable = 100100 is recognized as interest expense over the period
Present value = 1,000
Face amount =1,100
Discount on note payable = 100100 is recognized as interest expense over the period
Example 2: Note receivable
Paid 1,800 in cash and received a2,000 note receivable
Present value = 1,800
Face amount =2,000
Discount on note receivable = 200200 is recognized as interest income over the period
Present value = 1,800
Face amount =2,000
Discount on note receivable = 200200 is recognized as interest income over the period
Note exchanged for noncash assets
1. Cost of the asset = (1) or (2) whichever is more clearly determinable
(1) fair value of the asset
(2) market value of the note
(1) fair value of the asset
(2) market value of the note
2. If cost of the asset < face amount of the note
–> the difference is discount
–> discount is amortized using “interest method”
–> the difference is discount
–> discount is amortized using “interest method”
3. Amortization of discount
–> interest expense for note payable
–> interest income for note receivable
–> interest expense for note payable
–> interest income for note receivable
Example 3: Note payable
Purchased a property with 3,000 fair value and issued a3,300 note payable
Cost of the asset = 3,000
Face amount =3,300
Discount on note payable = 300300 is recognized as interest expense over the period
Cost of the asset = 3,000
Face amount =3,300
Discount on note payable = 300300 is recognized as interest expense over the period
Example 4: Note receivable
Sold a property with 4,000 fair value and received a4,400 note receivable
Fair value of the asset = 4,000
Face amount =4,400
Discount on note receivable = 400400 is recognized as interest income over the period
Fair value of the asset = 4,000
Face amount =4,400
Discount on note receivable = 400400 is recognized as interest income over the period
Balance Sheet Presentation
1. Discount is deducted from the face amount of the note
–> Contra-asset account for note receivable
–> Contra-liability account for note payable
–> Contra-asset account for note receivable
–> Contra-liability account for note payable
2. Premium is added to the face amount of the note