Imputation of Interest, ASC 835

Interest on Receivables and Payables

APB Opinion 21, August 1971
“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”

3. Amortization of discount
–> 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

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

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

2. If cost of the asset < face amount of the note
–> the difference is discount
–> discount is amortized using “interest method”

3. Amortization of discount
–> 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

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

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

2. Premium is added to the face amount of the note

 

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