Debt instrument (explicit interest)
1/1/X1, XYZ purchased a nonnegotiable, oneyear, 500,000 nominal value note paying a fixed, semiannual coupon of 19,615 from ABC, an unrelated party, for 500,000.
Implying an annual interest rate of 7.99%.
Determined using Excel's =RATE function adjusted for semiannual periodicity:
7.99% = ((1+RATE(1,19615,500000,500000,0,1))^2)  1
1/1/X1  1.1.X1 

Note 
500,000 



Cash in bank 

500,000 
3/31/X1, 6/30/X1, 9/30/X1, 12/31/X1  31.3.X1, 30.6.X1, 30.9.X1, 31.12.X1 

Accrued interest 
9,808 



Interest income 

9,808 
7/1/X1  1.7.X1 

Cash in bank 
19,615 



Accrued interest 

19,615 
1/1/X1  1.1.X1 

Cash in bank 
519,615 



Note 

500,000 

Accrued interest 

19,615 
Debt instrument (implicit interest)
1/1/X1, XYZ purchased a nonnegotiable, oneyear, 500,000 nominal value, zero coupon note from ABC, an unrelated party, for 462,963. The note was redeemed 12/31/X1. XYZ elected to not apply the effective interest method for interim reporting purposes.
Implying an annual interest rate of 7.99%.
Determined using Excel's =RATE function: 7.99%=RATE(1,0,462963,500000,0,1).
1/1/X1  1.1.X1 

Note 
462,963 



Cash in bank 

462,963 
3/31/X1, 6/30/X1 and 9/30/X 31.3.X1, 30.6.X1 a 30.9.X1 

Note 
9,259 



Interest income 

9,259 
12/31/X1  31.12.X1 

Cash in bank 
500,000 



Interest income 

9,259 

Note 

490,741 
Same facts except XYZ elected to use a discount account.
1/1/X1 1.1.X1 

Note 
500,000 



Discount 

37,037 

Cash in bank 

462,963 
3/31/X1, 6/30/X1 and 9/30/X 31.3.X1, 30.6.X1 a 30.9.X1 


9,348 



Interest income 

9,348 
12/31/X1  31.12.X1 

Discount 
9,348 



Interest income 

9,348 
Cash in bank 
500,000 



Note 

500,000 
Debt instrument (amortized cost accounting)
1/1/X1, XYZ purchased a nonnegotiable, oneyear, 500,000 nominal value, zero coupon note for from ABC, an unrelated party, 462,963. The note was redeemed 12/31/X1. XYZ elected to use amortized cost accounting for the interim periods.