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 accounting research on this topic.

Instructions

If your school has a subscription to the FASB Codification, log in and prepare responses to the following. Provide Codification references for your responses.

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?

Answer 1

Requirement a.

Business transactions habitually contain the exchange of cash or property, goods, or service for a note or related instrument. The use of an interest rate that differs from predominant interest rates permits appraisal of whether the face amount and the specified interest rate of a note or commitment provide dependable proof for properly recording the exchange and ensuing related interest.

Requirement b.

If an well-known exchange price is not determinable and if the note has no ready market, the problem of shaping present value is more challenging. To approximate the present value of a note under such conditions, a relevant interest rate is estimated which may fluctuate from the specified or coupon rate.

Requirement c.

Statement presentation of discount and premium. The discount or premium ensuing from the purpose of present value in cash or non-cash transactions is not an asset or accountability divisible from the note which gives rise to it.