How to Account for Implied Interest on a Notes Payable

[ptownbro]

Let's say you were given a loan for $400,000, but only received $300,000 in cash. The difference of $100,000 is assumed (or implied) to be interest. There is no interest rate given, no term length, no payment schedule (e.g. pay X amount monthly or yearly), and no due date. You pay the loan off when you can at any amount you can.

How can we record that $100,000 implied interest amount as an amortized amount? Meaning, we don't want to record a lump sum/one-time interest charge of $100,000 in one month. We want to spread that out over time, recording a portion of that interest each month.

However, how do you do that when you don't have a term, interest rate, compounding schedule, etc...?

 

[Shcoll]

I would estimate the number of years it will take to pay the loan off, divide the interest by the number of years in months
and allocate the amount to interest expense. Originally, I would debit the total $300K to cash, debit prepaid interest account for $100K , credit $300K to loan payable and credit $100K to interest payable account. When ever I paid, I would credit cash, debit both loan and interest payable accounts with appropriate amount. Debit interest expense and credit prepaid interest account with the amount mentioned above. This is what I will do. This is not a professional advice.

 

[kirby]

If there is no payment schedule and no due date, isn't the best strategy to never pay at all?

 

[Shcoll]

According to the description, the loan was for $400K the lender took 100K and gave net of $300K. That $100M is interest that must be allocated, since there was no date of payment I suggested to estimate based on how long it took to pay the loan.

 

[Shcoll]

According to the description, the loan was for $400K the lender took 100K and gave net of $300K. That $100M is interest it must allocated, since there was no date of payment I suggested to estimate based on how long it took to pay the loan.

The borrower can't take the funds free.

 

[ptownbro]

I would estimate the number of years it will take to pay the loan off, divide the interest by the number of years in months
and allocate the amount to interest expense. Originally, I would debit the total $300K to cash, debit prepaid interest account for $100K , credit $300K to loan payable and credit $100K to interest payable account. When ever I paid, I would credit cash, debit both loan and interest payable accounts with appropriate amount. Debit interest expense and credit prepaid interest account with the amount mentioned above. This is what I will do. This is not a professional advice.

Thanks for replying. That makes sense. I'm hoping others concur.