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U.S. GAAP Codification of Accounting Standards

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Accounting Standards, ASC

U.S. GAAP Codification of Accounting Standards
Codification Topic 835-30: Imputation of Interest

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Codification Topic 835-30
Imputation of Interest

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

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

International Financial Reporting Standards (IFRS)

IAS 23: Borrowing Costs