How to Calculate the Imputed Interest in Accounting

Calculate the imputed interest of a security to fully balance the value of the bond or debt.

Imputed interest refers to interest on a bond or debt considered to be paid, even though no payment of interest has been processed. Imputed interest is calculated based on the actual payments that should be paid, but have not yet been paid. Generally, it's applied to bonds or loans made at a rate below the going market rate -- or are made interest-free. To balance out transactions on your financial statements regarding bond and security transactions, add an entry for Imputed Interest to accrue the interest payable on the debt.

Things You'll Need

• Statement of Cash Flows -- Investing and Financing Activities
• Interest Rate of Issued Debt Notes, if applicable
• IRS Index of Federal Rates

Instructions

Calculating Imputed Interest

1. Determine the total amount of loans and notes currently issued at below-market rates to determine the amount due. If the loans are more than one year long, divide the loan amount by the number of years.

2. Look up the current rate set by the IRS as the minimum annual rate to be set on loans.

3. Divide the annual amount by the annual rate in Step 2, plus 1.00. This amount will be the amount considered by the IRS to be the principal amount.

4. Subtract the amount in Step 3 -- what the IRS considers the principal -- from the amount in Step 1. The remaining amount is the imputed interest amount to enter on your accounting statements.

References

• Internal Revenue Service: Index of Applicable Federal Rates
• Financial Dictionary: Imputed Interest
• Your Finish Rich Plan: IRS Imputed Interest Rate and Rules