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Let's talk about notes payable again, but this time we're gonna talk about non-interest bearing. So in the last video, we did interest bearing, and interest bearing was what you typically think of. You borrow some money up front, and then later you pay back the 1,000 plus some additional money. This is the typical setup you're gonna see. But what we're gonna talk about in this video is non-interest bearing. And that's kind of a misnomer because they do actually have interest. So this non-interest bearing is almost kind of a trick because it works like this. If you had a $1,000 non-interest bearing note payable, what it would look like is this.
At the end of the period, you would pay back $1,000. And so you may be thinking, "Oh, sure. I took out a loan for 1,000; at the end of the period, I pay back 1,000." That makes sense. That's non-interest bearing. But the trick is you only got 900 cash up front. So it really is interest bearing because, yeah, they gave you 1,000, but really, you only got cash of 900, and then you paid back 1,000. So there is some imputed interest rate in there. Now, let's see how we figure that out. If we do the same one that we did in the last video, we take a $60,000, six-month note payable.
But here we're gonna say the bank discounts it at 10%. And this discount right here, this is your-- basically, you're shortchanged. So if you took a 60,000, six-month note payable, you're gonna get some amount less than 60,000. And the bank kindly calls that a discount. But really, it's a short change. They're giving you less cash and then requiring that you pay 60,000 back at the end. And you can figure out the discount just like we figured out the interest expense on the last one. You say 60,000 times my 10% rate, which of course is an annual percentage rate, APR.
So then you have to say, for what portion of a year? And let's do this one in months. Let's say 6 months out of 12 months, which of course is half. So that would give us $3,000 as the discount.
So what it actually ends up looking like is the bank gives you 57,000, and you, at the end of six months, give the bank 60,000. So you can call that non-interest bearing all day long, but it's still an expense for borrowing the cash, right? You still have to pay back that extra $3,000 that the bank didn't give you in the first place. So what does this journal entry look like if we got cash of 57, but we certainly know we got a note payable of 60, right? Because six months later, you gotta pay the bank 60. So the note payable truly is 60.
Cash received really is 57. So that leaves us with this $3,000 gap. And this is just called a discount. And you can call it a discount on notes payable. Same thing. And the discount account, like all of our favorite accounts, is a contra account. So a discount is a contra liability. All it does is reduce notes payable. So now we've got our entry. We've got 60 on the debit side, and we've got 60 on the credit side while reflecting the fact that we received 57 of cash and we owe 60,000 back to the bank. Now, when you pay it off here, what is this gonna look like?
Because we're gonna pay 60,000 in cash, aren't we? We're gonna pay 60,000 in cash, and that only leaves room for the $60,000 note payable. But this discount was attached with this note payable. They're linked together, and so we don't wanna leave this discount on our books after this note payable is gone. So what we do is we reduce the discount. We get rid of it. So now that the note payable is gone, the discount is gone, and that becomes your interest expense.
Now, just for fun, I want you to think about something with me. If we had done, let's say this is a six month, and we got 60,000 up front and paid back 63 at the end versus what we really did, which is we got 57 up front and paid back 60 at the end. Now both of these, you end up paying 3,000 extra, right? This one was a 10% rate, and this one was discounted at 10%.
But which one is the better deal? What's the better actual rate? Well, think about it this way. We paid 3,000 to borrow 60, which comes out to something you would expect, 0.05 or 5% or half of 10. But in this one, what really happened? We paid 3,000 to borrow 57, and that comes out to 0.0526 or almost 5.3%. So really, this non-interest bearing loan carries a higher imputed interest rate because in both scenarios we paid $3,000. But in one scenario we got 60 up front, and the other scenario we got 57 up front.