What is the accounting Entry for : Zero-bearing interest note payable issued with Face Value 100000 for 3 years, Effective rate is 8%.

Initially: On receipt of cash on issuance of loan notes.

Dr Cash79,838

Dr Amortization discount20,162

Cr Long term Liability100,000

Its PV will be79383

Interest Payable :6720 (20,162  x1/3 ) 

Dr Interest exp6720

Cr  Amortization discount6720

note: This entry takes place over the period of that investment each year.

1: At issuance Date:

DR Cash79383

DR Discount on notes payable20617

CR Long Term Liability - Notes Payable100000

2: Interest Recognizing:

Interest will be calculated by multiplying Carrying amount of notes times effective rate, the results will be6351 &6859 &7407 for each year subsequently.

Accounting Entry for the Interest :

DR Interest Expenses 

CR Discount on notes payable

3: At maturity Date :

DR Long term debits - notes payable100000

CR Cash100000

If a non interest bearing note is a bond, the issuer is selling the bond at a deep discount and committing to pay back the face amount of the bond on its maturity date. This approach allows the issuer to avoid making periodic interest payments on the bond. Instead, all cash payment obligations by the issuer are concentrated at the maturity date of the bond.

The holder of a non interest bearing note should recognize imputed interest income on the instrument. This requires the following steps:

1. Calculate the present value of the note, discounted based on the market rate of interest.
2. Multiply the market rate of interest by the present value of the note to arrive at the amount of interest income.
3. Record the interest income as a credit to interest income and a debit to an asset account for the investment in the note. Over time, the ongoing series of debits associated with the recognition of interest income will increase the asset amount to the face value of the note.
4. When the issuer pays off the note, record a debit to cash and a credit to the asset account for the investment in the note.

The same approach is used by the issuer of the note, except that interest expense is recorded, and the value of a note payable liability account is gradually increased until such time as the debt is paid off at its face value.

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