If The Quality Control Corp. signs a note for $12,000 including interest, it is called a noninterest-bearing note because the $12,000 represents the total amount due at maturity and not the amount of cash received by The Quality Control Corp. Interest must be calculated (imputed) using an estimate of the interest rate at which the company could have borrowed and the present value tables. The present value of the note on the day of signing represents the amount of cash received by the borrower. The total interest expense (cost of borrowing) is the difference between the present value of the note and the maturity value of the note. In order to follow the matching principle, the total interest expense is initially recorded as “Discount on Notes Payable.” Over the term of the note, the discount balance is charged to (amortized) interest expense such that at maturity of the
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