Effective-interest method for notes receivable

The effective-interest method applies the note's supported effective yield to its carrying amount. Cash interest follows the stated rate and face amount. The difference amortizes a discount or premium.

Keep the two rate-and-balance pairs distinct

Suppose a $100,000 face note pays 3 percent annual interest but has an initial carrying amount of $84,811.89 and a 9 percent effective yield. First-year cash interest is $3,000. Interest revenue is:

$84,811.89 × 9% = $7,633.07

The $4,633.07 difference increases carrying amount to $89,444.96. The schedule continues until the carrying amount reaches the contractual maturity amount, subject to the note's cash flows and rounding convention.

Review the schedule as a control

Show opening carrying amount, effective interest, cash received, discount or premium amortization, and ending carrying amount for every period. Keep full precision inside the schedule and round only displayed amounts. Reconcile cash to the contract and the ending balance to the ledger.

Boundary and source

A schedule does not prove the initial transaction price, the market yield, collectibility, or modification treatment. Stop when those inputs lack support. Read ASC 835-30-35-2 for interest-method amortization and ASC 835-30-55-3 for a constant effective yield.