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I borrow $100 from the bank (with a 5 year maturity), but it has a 25% OID. So, I only get $75 in cash. So, my balance sheet would show: 75 increase to cash, 100 debt liability, and 25 current asset of OID. Let's assume that I pay a 8% interest rate on the debt.
The $25 current asset of OID gets amortized on the income statement at $5 per year, and gets included in the total interest expense line item, and is deductible for book purposes.
I pay interest expense of 8% interest rate X $75 of debt that I actually received cash proceeds, and that interest expense runs through the income statement.
Is this correct? If not, what should be changed? I feel especially unsure of whether the 8% interest rate should be multiplied by $75 or $100, but I don't want to doublecount the OID. Read More