# 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

# Capitalization of Interest, ASC 835

Capitalization of interest

SFAS 34, October 1979
“Capitalization of Interest”

Qualifying assets for interest capitalization
1. Assets that are constructed or produced
–> for the entity’s own use

2. Assets that are constructed or produced
–> for sale or lease as discrete projects

Interest cost is not capitalized
–> for inventories

Amount of interest to be capitalized
1. Amount to be capitalized
–> average accumulated expenditures x capitalization rate

2. Total amount of interest cost capitalized
–> cannot exceed the total interest cost incurred

Capitalization rate
1. Specific borrowings for the construction
–> interest rate for specific borrowings

2. For the average accumulated expenditures over the specific borrowings
–> weighted average interest rate of other borrowings

Capitalization period
1. Capitalization begins when (1), (2), (3) occur
(1) Interest cost is incurred
(2) Construction activities are in progress
(3) Expenditures are incurred

2. Capitalization ends when (4) and (5) occur
(4) The asset is substantially complete
(5) The asset is ready for its intended use

# Interest, ASC 835

Interest related topics

835-20: Capitalization of interest

For certain qualifying assets, interest costs are capitalized
–> and included in determining the acquisition cost of asset

835-30: 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