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Join nowHow do I record capitalized interest on a business loan that was on payment deferral?
Payments on our business loan have resumed, but the outstanding balance of the loan is now grater than the balance on our books. What is the proper way to adjust for this?
(Not PPP or CARES Act related)
Solved! Go to Solution.
Okay, what you have is interest that is charged but unpaid. Normally you might only enter interest as an expense when you cut a check for the loan payment not fully posting the interest as a separate bill, but here is how the banks look at it:
Monthly when your statement date rolls around interest is charged and added to your balance ee though you do not see it, then your p&i payment reduces both principal and interest.
With deferred interest, the interest is charged and added to your balance just the same. For your deferral of interest enter bills for the interest amount, payable to the lender, but do not add it to the actual loan principal unless you refinance or reamortize. If you are cash basis you won't deduct the interest until you pay it but if accrual the accrued interest billed is a current expense.
When you start paying again payments will be first applied to back and current interest before any monies are applied to principal, that is one reason to keep the interest added as a separate item.
Okay, what you have is interest that is charged but unpaid. Normally you might only enter interest as an expense when you cut a check for the loan payment not fully posting the interest as a separate bill, but here is how the banks look at it:
Monthly when your statement date rolls around interest is charged and added to your balance ee though you do not see it, then your p&i payment reduces both principal and interest.
With deferred interest, the interest is charged and added to your balance just the same. For your deferral of interest enter bills for the interest amount, payable to the lender, but do not add it to the actual loan principal unless you refinance or reamortize. If you are cash basis you won't deduct the interest until you pay it but if accrual the accrued interest billed is a current expense.
When you start paying again payments will be first applied to back and current interest before any monies are applied to principal, that is one reason to keep the interest added as a separate item.
Perfect. This makes sense. Thank you John!
Our books are cash based. Our loan agreement does not assume monthly payments, but requires capitalize accrued interest annually. How to make such growing liability visible in balance sheet?
If you're a cash basis taxpayer, then you do not accrue interest. An exception to that rule is a loan between related persons.
We have the same issue. I don't see a resolution posted. Did you get your question answered?
Thank you for posting this answer. I have deferred interest on a credit card. It's "special financing" at 0% interest, but deferred interest shows up on the monthly statement. If I pay the principal in full before the promotional time period ends, I will not have to pay any interest.
When I create the bill for the monthly deferred interest, to what account do I apply it?
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