Notes receivable and imputation of interest

Notes receivable and imputation of interest


1. If (A) > (B), the difference is recognized as discount on note receivable
(A) face amount of note receivable
(B) present value of note receivable

2. Example 1:
On August 1, 2011, Entity A loaned $100,000 cash to Entity B
--> and received a promissory note of $112,000 from Entity B
--> note is due on July 31, 2012

Face amount = $112,000
Present value = $100,000
Discount = $112,000 - $100,000 = $12,000

3. Discount on note receivable is amortized
--> and recognized as interest income

4. Interest income for 2011 (August 1 - December 31)
--> $12,000 x 1/12 x 5 months = $5,000

5. Interest income for 2012 (January 1 - July 31)
--> $12,000 x 1/12 x 7 months = $7,000

6. Journal entry on August 1, 2011

debit credit Notes receivable 112,000         Cash   100,000       Discount on notes receivable   12,000 7. Journal entry on December 31, 2011 To record interest income for August 1, 2011 - December 31, 2011

debit credit Discount on notes receivable 5,000         Interest income   5,000 8. Journal entry on July 31, 2012 To record interest income for January 1, 2012 - July 31, 2012

debit credit Discount on notes receivable 7,000         Interest income   7,000 9. Journal entry on July 31, 2012

	debit	credit
Cash	112,000
Notes receivable		112,000