Interest expense for a loan with a grace period?


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Hello there,

I'm having an issue with what is probably a stupid question. I'm modeling financial statements for a company with a loan with a 2-year grace period on both interest and principal. During said period, the company pays no interest but the loan principal grows by the amount of the interest that should've been paid. My question is, should the P&L reflect the interest expense on those two years? Or should it be equal to zero?

Thanks!
 
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Steve-LevelUp

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This is known as PIK interest. You would record the interest expense as normal and accrue the expense to "Interest Accrued". Depending on the cycle (some do it quarterly or annually) you would move the accrued interest to Principal, increase your principal balance, thereby increasing your monthly interest expense.
 

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