However, interest expense cannot be deducted until it “economically accrues.” Interest expense accrues on a daily basis over the life of the loan. If a cash-basis corporation prepays interest expense, it must capitalize the pre-paid interest and deduct it over the period to which it relates. Thus, a cash-basis corporation deducts interest ... Apr 23, 2012 · An example of interest expense vs. interest paid would be when a bond sells at a rate different from it's coupon rate (i.e. it sells at a premium or a discount). Example: $1,000 10 year bond with a coupon of 5%, when the market rate for such a bond is 8%. The bond (assuming annual coupon payments) sells for $798.697558. Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond investors, and other sources. This is because the net effect of losing a tax shield is losing the value of the tax shield, but gaining back the original expense as income. In our interest expense example, the annual value of the shield is $280,000. We now assume, however, that this debt was a convertible bond.