APB 21 Interest on Receivables and Payables

INTRODUCTION
Problem. Business transactions often involve the exchange of cash or property, goods, or service for a note or similar instrument. The use of an interest rate that varies from prevailing interest rates warrants evaluation of whether the face amount and the stated interest rate of a note or obligation provide reliable evidence for properly recording the exchange and subsequent related interest. This Opinion sets forth the Board’s views regarding the appropriate accounting when the face amount of a note does not reasonably represent the present value i1 of the consideration given or received in the exchange. This circumstance may arise if the note is noninterest bearing or has a stated interest rate which is different from the rate of interest appropriate for the debt at the date of the transaction. Unless the note is recorded at its present value in this circumstance the sales price and profit to a seller in the year of the transaction and the purchase price and cost to the buyer are misstated, and interest income and interest expense in subsequent periods are also misstated. The primary objective of this Opinion is to refine the manner of applying existing accounting principles in this circumstance. Thus, it is not intended to create a new accounting principle.