Answer
Imputed interest refers to a circumstance which is void of the appropriate interest factor. It would be the result if a process of interest rate estimation called imputation.
An interest rate is imputed for notes receivables when:
1. There is no stated interest rate for the transaction.
2. The stated interest rate is unreasonable, or
3. The face value of a note is different from the market value or cash price for the debt instrument.
Work Step by Step
In imputing a suitable interest rate, consideration should be given to the initial interest rates for similar instruments of issuers with similar collateral, credit ratings, as well as restrictive covenants.
