Imputed and Implicit Costs
that are attributable to the use of one's own factor of production, such
as the use of one's own capital, are imputed costs.
In accounting, imputed costs are often ignored when recording transactions.
imputation is the process that estimates the interest rate to be used
in finding the cash price of an asset.
An imputed interest rate is similar to an implicit interest rate
in that it equates the present value of payments on a note with the face
of the note, but it can also be established by factors not associated
with the note transaction or underlying contract.
The imputed rate approximates a negotiated rate (a fair market
interest rate) between independent borrowers and lenders.
The imputed rate takes into consideration the term of the note,
the credit standing of the issuer, collateral, and other factors.
For example, an investor is considering the purchase of a large
tract of udeveloped land. The
offering price is $450,000 in the form of a non-interest-bearing note
that is to be paid in three yearly instalments of $150,000.
There is no market for the note or the property.
When the investor considered the current price rate, his credit
standing, the collateral, other terms of the note, and rates available
for similar borrowings, a 12% interest rate is imputed.
interest is interest implied in a contract.
It is neither paid nor received.
The implicit interest rate equates the present value of payments
on a note with the face of the note.
The implicit rate is determined by factors directly related to
the note transaction. For
example, assume that a dealer offers to sell a machine for $100,000 cash
or $16,275 per year for ten years.
By dividing the cash price by the annual payments
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