To record the cash equivalent amount through a present value calculation, the accountant must estimate the interest rate appropriate for discounting the future amount to the present time. The the carrying value of a long-term note payable is computed as rate will reflect the length of time before the money will be received as well as the credit worthiness of MedHealth, Inc. Let’s assume that the appropriate rate is 10% compounded annually.

• The current portion of long-term debt refers to the amount that the business has to pay within the current period.
• This will be illustrated when non-interest-bearing long-term notes payable are discussed later in this chapter.
• The interest expense of a discount bond increases over time due to the increasing carrying value.
• One of the easiest and most commonly accepted methods of computing for depreciation is the straight-line depreciation method.
• Other liabilities such as accounts payable or accrued liabilities are missing from the list.

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The same is reported in the company’s balance sheet and is also called the book value. The CV of the bond can also be mentioned as the book value of the bond. A company usually issues bonds at a premium or discount of the face value. Carrying value can be defined as the difference between the face value of the bond and the unamortized portion of the premium or discount.

• In an operating lease the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor.
• Discount amortization transfers the discount to interest expense over the life of the loan.
• Also, under ASPE, a new effective interest rate is determined by comparing the carrying amount of the original, old debt with the present value of the revised cash flows.
• Operating capital in a company or firm usually refers to production inputs that are normally used up within a production year.
• On the other hand, investment capital refers to durable resources like machines and buildings in which money invested is tied up for several years.
• Replacements should be accounted for under the substitution approach which requires removing the cost of the existing asset and its accumulated depreciation from the books and charging current expense for the difference.

Premiums and discounts are amortized over the life of the bond. Determine the present value of seven-year bonds payable with a face value of $93,000 and stated interest rate of 10%, paid semi-annually. Major expenditures made in connection with the renovation or alteration of a space rented for Bank use should be capitalized in Deferred Charges (see paragraph 4.20). A leasehold improvement must be capitalized if the cost is $25,000 or more. The cost of minor repairs and maintenance involved in the upkeep of leased quarters should be charged to current expense. Lease payments do not include variable lease payments other than those noted above, any guarantee by the lessee of the lessor’s debt, and amounts allocated to nonlease components.

Financial Accounting Manual for Federal Reserve Banks, January 2022

Variable lease payments shall be recognized as rental income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. Finance lease lessors recognize a lease receivable asset equal to the present value of future lease payments and de-recognize the leased asset, simultaneously recognizing any difference as a gain or loss. The lease receivable is subsequently reduced by each lease payment using the effective interest method. Interest income is reported on the income statement, typically as revenue, and the entire cash receipt is reported under operating activities on the statement of cash flows.

Depreciation is the lowering of the value of a tangible asset because of wear and tear. Tangible assets include buildings, equipment, furniture, and vehicles. One of the easiest and most commonly accepted methods of computing for depreciation is the straight-line depreciation method. In the preceding entries, notice that interest for three months was accrued at December 31, representing accumulated interest that must be paid at maturity on March 31, 20X9. On March 31, another three months of interest was charged to expense. The cash payment included $400 for interest, half relating to the amount previously accrued in 20X8 and half relating to 20X9.