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Section 3120: Imputation of Interest
[U.S. GAAP Codification Topic]
835-30 Imputation of interest
[U.S. GAAP before the Codification]
APB Opinion 21, August 1971, Interest on Receivables and Payables
1. Imputation of interest
For notes exchanged for cash or other assets
(1) If face amount of the note > cash or fair value of the asset
--> the difference is discount
(2) If face amount of the note < cash or fair value of the asset
--> the difference is premium
(3) discount or premium is amortized using "interest method"
2. 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
3. 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
4. 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
5. Note exchanged for noncash assets
(1) Cost of the asset = (a) or (b) whichever is more clearly determinable
(a) fair value of the asset
(b) 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
6. 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
7. 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
8. 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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