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.
Thanks