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Capitalized Interest

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We currently have a note receivable on our books. We have been accruing interest for the past 5 months. The note was renegotiated and we now need to capitalize the interest (add it to the note balance). I know that I need to debit my asset (note receivable). My first instinct was to offest with a credit Interest income as the becuase that is what was used for the previous accruel but that will only increase interest income. Should I credit accrued interest. I am over analyzing this I'm sure but need a bit of help.

QuickBooks Desktop

RainflurryAnswer

@pipeman

This is what's known as paid-in-kind (PIK) interest. It is considered income to you when you add it to the note receivable balance regardless if you're an accrual or cash basis taxpayer. Did you recognize income when it was accrued? If so, debit note receivable, credit accrued interest.

BigRedConsulting

RE: The note was renegotiated and we now need to capitalize the interest (add it to the note balance).

If you're tracking it as a liability, open the liability account register - double click the account on the chart of accounts - and make one or more entries using the interest expense account that increase the account balance by the amount of the interest.

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pipemanAuthor

We are the note holder and it is a receivable. There is no interest expense.

BigRedConsulting

Oh, I see. Well, then the same answer but for an Asset account and using an income account for the interest, not an expense.

Or, If you're tracking the note receivable in an Accounts Receivable type account, then to increase the customer balance you can use the finance charge feature or just enter additional invoices each month for the interest accrued on the balance. Either way does basically the same thing.

RainflurryAnswer

@pipeman

This is what's known as paid-in-kind (PIK) interest. It is considered income to you when you add it to the note receivable balance regardless if you're an accrual or cash basis taxpayer. Did you recognize income when it was accrued? If so, debit note receivable, credit accrued interest.

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pipemanAuthor

Exactly what I did! Thank you

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