How to Amortize Imputed Interest

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Nobody lends money for free. Lenders and borrowers are expected to report interest revenue or expense on receivable and payable notes, even if there is no stated interest rate. This is called imputed or implied interest. Imputed interest must be calculated and amortized over the contract period of a note, as per U.S. generally accepted accounting principles. The term "amortize" refers to the allocation of interest revenue or expense to each period of a note in which payments are paid and received.

Calculate the present value of the note using the following equation for the present value of an ordinary annuity: PVoa = PMT [(1 - (1 / (1 + i)n)) / i]. In this equation, "PVoa" is the present value of an ordinary annuity, "PMT" is the amount of each payment, "i" is the interest rate and "n" is the number of periods. Use the market interest rate for similar transactions when determining the present value of a non-interest-bearing note.

Find the difference between the face value of the note and the present value of the note. This is the amount of imputed interest to be amortized over the contract period of the note.

Multiply the market interest rate for similar transactions by the present value of the note for the first period. This is the amount of imputed interest to be amortized for that period.

Repeat these steps for each subsequent period.

Tips & Warnings

  • All imputed interest must be amortized, leaving $0 of unamortized interest at the end of the final period.

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