In short
When a note has no stated interest or an unreasonably low rate, it is recorded at its present value using a market rate (the imputed rate). The difference from face value is a discount amortized as interest over the note's life.
Key takeaways
- If the note is exchanged for goods, the goods' fair value may set the note's value instead.
- It doesn't apply to receivables from normal trade terms of a year or less.
- The discount is amortized with the effective interest method.
Example
A $100,000 non-interest-bearing note due in 2 years, at 8%, is recorded at $85,734; $14,266 is interest income over the 2 years.
Where it's tested
FAR: Cash, Receivables & Bad Debts — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Which item is properly included in cash and cash equivalents?