#### Jazzies

I don't understand how my text book came up with these numbers.

They were teaching my how to measure Interest Payable and Interest Expense on year end for example one.
They didn't tell me what "P/A" and "P/F" is.

Things to know on the attached file:
Example one entailed that Lionel sold Baylor inventory payable every march 31st. Baylor received a 2 year note with 4% interest. Both market and stated interest were equal in this example.

Example two, is written very differently and is very confusing to me.
Any help is appreciated. Thank you!

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#### bklynboy

VIP Member
All they are showing is that when loans are issued with below market rates, you need to record it at the value using the market rate. This is the real cost of the transaction and how it should be accounted for.

#### davidlee21

The stated interest rate is the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year.

The prevailing rate of interest offered on cash deposits, determined by demand and supply of deposits and based on the duration (the longer the duration, the higher the rate) and amount (the higher the amount, the higher the rate) of deposits.

#### bklynboy

VIP Member
The stated interest rate is the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year.

The prevailing rate of interest offered on cash deposits, determined by demand and supply of deposits and based on the duration (the longer the duration, the higher the rate) and amount (the higher the amount, the higher the rate) of deposits.
Not sure I follow the second paragraph. Short term rates are based off the Fed Funds rate and determined by Federal reserve. Longer rates generally are higher but all depends on steepness of yield curves for inflation expectations. I don't see how supply and demand factors in using bank deposits. Also higher the amount does not mean a higher rate. banks may give a sweetener to the rate if its above a large amount but usually not significant and the base rate is still 100% correlated to the yield curve.

#### Jazzies

Thank you so much everyone for the explanation! I was mainly asking how they got the numbers but I figured it out.
They calculated Present value and the time value of money!
All the explanations were accurate and correct thank you!