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 1,100 note payable
Present value = 1,100
Discount on note payable = 100 is recognized as interest expense over the period
Present value = 1,100
Discount on note payable = 100 is recognized as interest expense over the period
Example 2: Note receivable
Paid 2,000 note receivable
Present value = 2,000
Discount on note receivable = 200 is recognized as interest income over the period
Present value = 2,000
Discount on note receivable = 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
(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 3,300 note payable
Cost of the asset = 3,300
Discount on note payable = 300 is recognized as interest expense over the period
Cost of the asset = 3,300
Discount on note payable = 300 is recognized as interest expense over the period
Example 4: Note receivable
Sold a property with 4,400 note receivable
Fair value of the asset = 4,400
Discount on note receivable = 400 is recognized as interest income over the period
Fair value of the asset = 4,400
Discount on note receivable = 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
–> Contra-asset account for note receivable
–> Contra-liability account for note payable
2. Premium is added to the face amount of the note