Question

How valuable is calculating the interest rate on a loan, especially for a nonprofit organization? What would happen if interest rates were miscalculated? What would be the impact on a budget of miscalculated interest rates? Responses should apply concepts learned.

Answer 1

I don't know what exact concepts are you talking about. But yes calculating interest rate on loan is valuable for NPOs but only for accounting purpose to maintain transperancy.

Actually we should not say it as valuable because although interest payments might differ based on government regulations to issue loans to the NPOs as compared to POs. And other thing is that NPOs are tax exempt. So for POs we know that they are charged a particular tax bracket and have to pay taxes, moreover they get a tax shield on this interest payment that they pay which is actually not enjoyed by the NPOs. So its actually not proving any value to NPOs although they are paying it.

If interest rates and hence the payments were miscalculated, this would affect the accounting of NPOs, just as it does for other organisations. In Budgeting for the NPOs the support that is received by the NPOs needs to be recorded for the upcoming year. If there is some misbalance in the accounts then there is an account for Resource Development to balance it. The interest payments for previous year also needs to be taken into account in the expenses side that needs to be paid in the upcoming year, so this would be affected if interest rates are miscalculated.

Hence miscalculation is an issue for NPOs as well