Long term Non-interest bearing note does not charge any interest on the outstanding debt. Instead they are issued at a price lower than their face value. This difference between the face value and the issue value is commonly referred to as 'discount on notes payable' is the accumulation of present values of the interest payable across the life of the notes payable.
The effective rate of interest can be computed on such a notes as follows:
PV = FV / (1 + i%)n
where PV = The cash received against the notes (issue value)
FV = Face Value of the notes payable at the end of the term
n = The period of Notes payable
I = effective interest thereon, we need to compute this.
Other way we can say: I% = { n√(PV/FV) } - 1
Thus we compute the effective interest.
earned income 1. When a company exchanges a long-term, non-interest-bearing note for cash and no interest...
When the stated interest rate is lower than the effective interest rate for a long-term note receivable, the note is issued at a value that reflects an average of the stated and effective interest rates. a premium. face value. a discount.
E7.11 (LO 6) (Interest-Bearing and Non–Interest-Bearing Notes) Little Corp. was experiencing cash flow problems and was unable to pay its $105,000 account payable to Big Corp. when it fell due on September 30, 2020. Big agreed to substitute a one-year note for the open account. The following two options were presented to Little by Big Corp.: Option 1: A one-year note for $105,000 due September 30, 2021. Interest at a rate of 8% would be payable at maturity. Option 2:...
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Question 1: Last year the company exchanged a piece of land for a non-interest-bearing note. The note is to be paid at the rate of $13,700 per year for 9 years, beginning one year from the date of disposal of the land. An appropriate rate of interest for the note was 12%. At the time the land was originally purchased, it cost $83,700 What is the fair value of the note ? Question 2:James Kirk is a financial executive with...