ACCT 110 Lecture Notes - Lecture 29: Special Purpose Entity, Effective Interest Rate, Book Value
Document Summary
Difference between market rate and stated interest rates. Interest cash flows are dictated by stated rate but all cash flows are discounted at the market rate in determining the note"s present value. When market rate > stated rate, the present value of the note is less than the face value. When market rate < stated rate, the present value of the note is more than the face value. When issuing note, record the journal entry using the present value of the note discounting it using the market rate. You receive the interest each year in cash, but what you recognize each year as interest income is the cash received plus the discount (face value - present value) amortized over the life of the loan. **the interest income recognized is the carrying amount of the note times the market interest rate.
