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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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This note was uploaded on 12/25/2011 for the course FIN 3312 taught by Professor Staff during the Spring '08 term at Texas State.

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