# 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 a \$1,100 note payable
Present value = \$1,000
Face amount = \$1,100
Discount on note payable = \$100
\$100 is recognized as interest expense over the period

Example 2: Note receivable
Paid \$1,800 in cash and received a \$2,000 note receivable
Present value = \$1,800
Face amount = \$2,000
Discount on note receivable = \$200
\$200 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 a \$3,300 note payable
Cost of the asset = \$3,000
Face amount = \$3,300
Discount on note payable = \$300
\$300 is recognized as interest expense over the period

Example 4: Note receivable
Sold a property with \$4,000 fair value and received a \$4,400 note receivable
Fair value of the asset = \$4,000
Face amount = \$4,400
Discount on note receivable = \$400
\$400 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