Ch 14 Bridge to the Profession
GAAP for zero-interest-bearing note
Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company 's production line.
As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie 's accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some account research on this topic.
(a) Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting. (b) How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called? (c) Where should a discount or premium appear in the financial statements? What about issue costs?
————————————————————————————
This work requires that you consider the fair value of the note on the seller 's books (note receivable). Portion of the codification are cut and pasted into the document for you.
There are two pieces of purchasing an asset with a note. The asset value and the value of the note. Here, the asset value is not known. Below it discusses that if you don 't know the value of the asset, you use the value of what was exchanged for it.
Quotes from Codification 360 Assets 845 Nonmonetary Transactions 10 Overall 30 Initial Measurement
30-8 Fair
Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company 's production line.
As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie 's accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some account research on this topic.
(a) Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting. (b) How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called? (c) Where should a discount or premium appear in the financial statements? What about issue costs?
————————————————————————————
This work requires that you consider the fair value of the note on the seller 's books (note receivable). Portion of the codification are cut and pasted into the document for you.
There are two pieces of purchasing an asset with a note. The asset value and the value of the note. Here, the asset value is not known. Below it discusses that if you don 't know the value of the asset, you use the value of what was exchanged for it.
Quotes from Codification 360 Assets 845 Nonmonetary Transactions 10 Overall 30 Initial Measurement
30-8 Fair