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Chapter 7: Question 16Q (page 362)

What is 鈥渋mputed interest鈥�? In what situations is it necessary to impute an interest rate for notes receivable? What are the considerations in imputing an appropriate interest rate?

Short Answer

Expert verified

Theestimated interest rate that is different from the established rate is known as the imputed interest rate. The imputed interest rate for note receivables is under three situations, and it is estimated using the interest rate for similar securities.

Step by step solution

01

Definition of Market Interest Rate

The interest rate offered by the market for any kind of cash deposit is known as the market interest rate. It is decided by considering various macroeconomic factors.

02

Imputed Interest 

The imputed interest rate used for a specific situation or a debt different from the established or specified interest rate is known as the imputed interest rate. It is the outcome of the estimate made by the business entity.

Interest rate is imputed for a note receivable in the following conditions:

1. There doesn鈥檛 exist an interest rate for note.

2. The interest rate stated for a note is not reasonable.

3. The face amount of note receivable is different from the current price.

In determining the imputed interest rate, consideration must be given to the interest rates prevailing in the market for similar securities.

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Most popular questions from this chapter

Use the information presented in BE7-16 for Horton Corporation. Prepare any entries necessary to make Horton鈥檚 accounting records correct and complete.

Indicate three reasons why a company might sell its receivables to another company.

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Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Taylor Swift Inc. shows the following balances.

Debit

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Instructions

Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,700 credit balance.
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