Effective Interest Rate Method + Balance Sheet Not Balancing

My BS is off balance sheet is off balance by a non-cash amount due to the use of the Effective Interest Rate Method and I’m hoping someone has experience adjusting their model.

Supppose a company drew on a revolver for $265m and the co capitalized a $8.5m transaction cost associated with the loan so the beginning book value of the loan is $256.5m. The interest rate on the revolver is 4.5% and the market rate is 5.4%.

After the first year, the company will pay cash interest of $265m x 4.5% = $11.92m and recognize accrual interest of $256.5m x 5.4% = $13.85m. The difference will be graudally added to the outstanding loan balance so after the first year, the ending book value of the loan is $256.5m + $1.93m = $258.43m.

IS: Recognizing accrual $13.85m of interest

CF: Adding back this accrual to CFO and deducting cash interest of $11.92m in CFF

BS: My debt balance is being pulled in from my debt schedule, which is using the ending book value of debt of $258.43 but A-L = $1.93, not zero. Why is this happening if my debt is being valued up? I really don’t want to use a plug and I’m hoping someone has come across this problem.


I have few questions out of curiosity…

You recognize PV of 265 discounted @5.4% in B/S. When loan becomes due you have a B/S Cr. balance of 265 given the equation PV+ACCRUAL-CASH INTT. Issuance cost would be capitalized and expensed over the term of the loan.

CF: Accrual is added and cash intt is also deducted from CFO…only the principal amts affect CFF…given you are following US GAAP.

BS: -13.85( as Net income is reduced) +1.93 (incremental value of loan)…and on the asset side your cash balances decrease by 11.92…

I did come across this problem long time back…but didn’t use a plug. Sometimes plugs can be very significant