Question

What represents interest expense chargeable to future periods for a zero-interest note?

Answer 1

Interest expense chargeable to future periods for a zero-interest note represents the cost of borrowing money over time.

Step-by-step explanation:

Interest expense chargeable to future periods for a zero-interest note represents the cost of borrowing money over time.

When a company issues a zero-interest note, it means that no interest is paid during the term of the note. However, to account for the time value of money, the company needs to recognize the interest expense that would have been charged if the note had carried an interest rate. This is done by using an imputed interest rate to calculate the interest expense over the life of the note.

For example, if a zero-interest note has a face value of $10,000 and a maturity of 5 years, and the market interest rate is 5%, the company would calculate the interest expense as follows:

1. Calculate the present value of the future payment using the market interest rate. In this case, the present value would be $7,835.05.
2. The difference between the face value and the present value is the imputed interest expense, which would be $10,000 - $7,835.05 = $2,164.95.