How to Account for Imputed Interest
Certain types of loans don't pay interest until the end of the loan term. Zero-coupon bonds are one such instrument in which investors loan money to a corporation through the purchase of a bond. The interest isn't paid until the bond matures, though the Internal Revenue Service may impute interest annually to collect taxes sooner than later. Investors need to account for imputed interest to properly record income with the IRS.
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Instructions
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Factor any compounding and establish the future value. Assume a $10,000 loan with 5 percent compounded annually for five years. Calculate the annual interest payment based on future value: Future Value = Present Value (1+r)^n. The variable "r" is the interest rate and variable "^n" is the number or periods raised as an exponent: total interest is $2,762.82.
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Determine the amount of interest paid presently. If $10,000 was invested, you receive $500 for the first year's 5 percent interest rate.
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Amortize interest over the five-year period. The second year calculates 5 percent on $10,500, the imputed yield after year one, or $525. Year three calculates 5 percent on $11,025, yielding $551.25 imputed interest. Year four has $578.81 imputed interest and the final year has $607.75 imputed interest.
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Add imputed interest to Schedule B, Interest and Ordinary Dividend, as a line item in Part I, Interest. List the loan or bond the interest is derived from and write the value, $500, in the amount column.
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Record imputed interest for all years the loan is in effect based on the amortized values.
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