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.

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. 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? Where should a discount or premium appear in the financial statements?

Answer 1

a) The literature says that you esteem resources obtained by the estimation of that advantage. On the off chance that you don't have any acquaintance with it, you should gure it out, if conceivable, by taking a gander at the money value you could have paid (yet didn't). Or on the other hand, in the event that there is only no real way to gure it out sensibly, at that point you take a gander at the reasonable estimation of the thing exchanged, for this situation the note. In this way, you check whether there is a market an incentive for the note. Is it exchanged? Does it bear a loan fee so you can get its current estimation? No! The estimation of this note isn't promptly clear since you don't have a loan cost to use to limit it back to the current worth. In this way, you need to credit a loan cost (entire other segment in the codication!). Another case of trouble esteeming a benefit trade would be the point at which a rm leases, as opposed to sells, their stock. What is the selling cost? The current estimation of the base future rentals are utilized to set up a conceivable selling cost to record the deal and the gross prot from the deal.

Another case of trouble esteeming a benefit trade is when resources are exchanged and there is no money cost or money trade. You would utilize the estimation of whichever resource is all the more promptly decided, for example, the cost of the stock on effectively exchanged trades.

(b) You have to discern an interest rate by looking at the prevailing interest rates for similar instruments with rms of similar credit status to this one. This is called the imputed interest rate.

(c) The discount or premium is a contra account to the note receivable on the issuer’s books (reduces assets in the balance sheet). Cost to issue should be spread over the life of the note (capitalized as asset in the balance sheet and amortized over life of note).