Purchase Solution

GAAP for zero-interest-bearing note

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
Solution Summary

Your response is 1,063 words plus a reference to the FASB codification. 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 so you know the theory and then I answer the specific questions asked. The codification is provided as a courtesy and is not inserted into the discussion in footnote fashion. (Note: This is not for novices - it requires some experience with financial principles at the intermediate accounting level.)

Solution Preview

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 value should be regarded as not determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to an asset received in a nonmonetary transaction accounted for at fair value. An exchange involving parties with essentially opposing interests is not considered a prerequisite to determining a fair value of a nonmonetary asset transferred; nor does an exchange ensure that a fair value for accounting purposes can be ascertained within reasonable limits. If neither the fair value of a nonmonetary asset transferred nor the fair value of a nonmonetary asset received in exchange is determinable within reasonable limits, the recorded amount of the nonmonetary asset transferred from the entity may be the only available measure of the transaction.
310 Receivables
10 Overall
30 Initial Measurement
Certain Receivables

30-1 The following provides initial measurement guidance for certain notes receivable, specifically those exchanged for cash and those exchanged for ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
Recent Feedback
  • "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
  • "Thank, this is more clear to me now."
  • "Awesome job! "
  • "ty"
  • "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

View More Free Quizzes
Related BrainMass Solutions

  • Notes receivable

    zero-interest-bearing note receivable? Why? For the interest bearing note the interest revenue should be determined as Face Value of Note X Interest Rate X 6/12 (for the period July to Dec).

  • Journal Entries, Adjusting Entries and Note Balance

    It also explains how to calculate the ending balance for interest bearing and zero interest notes.

  • Accounts and Notes Payable

    Comute the total net liability to be reported on the december 31 balance sheet for: 1. the interest-bearing note. 2. the zero-interest-bearing note.

  • What amount of interest revenue should be included in Ty's 2005 income statement?

    134070 Amount of Interest Revenue to Be Included in Income Statement On January 1, 2004, Ty exchanged equipment for a $600,000 zero-interest-bearing note due January 1, 2007.

  • Transaction Analysis of Darby Coporation

    note $ __________ (2) The zero-interest-bearing note $__________ The attached file contains the solution.

  • Accounting for a Non-interest Bearing Note

    384607 Identify the authoritative literature that provides guidance on the zero interest bearing note. Kevin company has been operating for just 2 years, producing specialty golf equipment for women golfers.

  • Entries for zero-interest- bearing notes

    235914 Entries for zero-interest- bearing notes On 12/31/07 Joe Smith Company acquired a computer from Louis Corporation by issuing a $400,000 zero-bearing note payable in full on 12/31/11.

  • Installment Sales and Revenue for Glanville Co

    Otter signed a non-interest bearing note requiring payment of $15,000 annually for six years. The first payment was made on 1/1/2011. The prevailing interest rate for this type of note at date of issuance was 8%.

  • Acme Company

    Purchases land having a fair market value of $329,000.00 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $554,384.74.

View More Related Solutions