GAAP for zero-interest-bearing note Essay

Wie Company has been operating for righteous 2 years, producing strength golf game 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 change flows from operations. However, current expansion plans go awaying require some borrowing to wave the companys production line. As part of the expansion plan, Wie will acquire some used equipment by signing a zero- gratify-bearing feeling. The line of work has a maturity re observe of $50,000 and matures in 5 years. A authoritative seemly value measure for the equipment is not available, given the age and lastingness nature of the equipment.As a result, Wies accounting staff is ineffectual to determine an established switch over toll for recording the equipment (nor the involution post to be used to record interest expense on the long-run telephone circuit). They have asked you to conduct some account research on th is topic. (a) strike the authoritative literature that provides guidance on the zero-interest-bearing tick off. Use some of the drills to explicate how the standard applies in this setting.(b) How is present value determined when an established alter terms is not as definiteable and a note has no bring in market? What is the resulting interest stride often c anyed?(c) Where should a terminate or reward appear in the financial statements? What about issue be?This work requires that you consider the fair value of the note on the vendors books (note receivable). Portion of the codification are cut and pasted into the record for you. There are two pieces of purchasing an addition with a note. The plus value and the value of the note. Here, the asset value is not known. Below it discusses that if you adoptt know the value of the asset, you use the value of what was change for it. Quotes from computer code360 Assets845 Nonmonetary Transactions10 Overall30 sign Measureme nt 30-8 somewhat value should be regarded as not determinable inwardly sane 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 convert involving parties with essentially opposing interests is not considered a prerequisiteto 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 make sense of the nonmonetary asset transferred from the entity may be the only available measure of the transaction.310 Receivables10 Overall30 Initial MeasurementCertain Receivables 30-1The following provides initial measurement guidance for certain notes receivable, specifically tho se exchanged for money in and those exchanged for property, goods, or services. Such notes may be originated by an entity or purchased from a third party. 30-3 As indicated in paragraph 835-30-25-8, notes exchanged for property, goods, or services are valued and accounted for at the present value of the consideration exchanged between the contracting parties at the date of the transaction in a manner correspondent to that followed for a cash transaction. 30-5 As indicated in paragraph 835-30-25-10, in circumstances where interest is not stated, the stated amount is unreasonable, or the stated face amount of the note is materially different from the current cash sales price for the same or similar items or from the market value of the note at the date of the transaction, the note, the sales price, and the cost of the property, goods, or services exchanged for the note shall be recorded at the fair value of the property, goods, or services or at an amount that reasonably approximat es the market value of the note, whichever is the more clearly determinable.30-6 Paragraph 835-30-25-11 excuses that, in the absence of established exchange prices for the related property, goods, or services or evidence of the market value of the note (as describe in paragraph 835-30-25-2), the present value of a note that stipulates either no interest or a charge per unit of interest that is clearly unreasonable shall be determined by discounting all upcoming payments on the notes using an assignd rate of interest as described in Subtopic 835-30. Paragraph 835-30-25-11 explains that this determination shall be made at the term the note is acquired any subsequent changes in prevailing interest rank shall be ignored. Now, to your questionsWie Company has been operating for just 2 years, producing specialty golfequipment 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 fl ows from operations. However, current expansion plans will require some borrowing to hit the ceiling the companys 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 time-tested fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wies accounting staff is uneffective 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) tell apart 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.The literature says that you value assets acquired by the value of that asset. If you gaint know it, you are sup posed to figure it out, if possible, by expression at the cash price you could have paid (but didnt). Or, if at that place is just no way to figure it out reasonably, then you look at the fair value of the item traded, in this case the note. So, you see if there is a market value for the note. Is it traded? Does it bear an interest rate so you can get the present value of it? No The value of this note isnt immediately apparent because you dont have an interest rate to use to discount it back to the present value. So, you have to impute an interest rate (whole other section in the codification). another(prenominal) example of difficulty valuing an asset exchange would be when a substantial leases, rather than sells, their inventory. What is the selling price? The present value of the minimum future rentals are used to establish a likely selling price for the purpose of recording the sale and the gross profit from the sale.Another example of difficulty valuing an asset exchange is when assets are traded and there is no cash price or cash exchange. You would use the value of whichever asset is more readily determined, such as the price of the stock on actively traded exchanges. (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? You have to discern an interest rate by looking at the prevailing interest rates forsimilar instruments with firms of similar credit status to this one. This is called the imputed interest rate. (c) Where should a discount or premium appear in the financial statements? What about issue costs? The discount or premium is a contra account to the note receivable on the issuers books (reduces assets in the eternal rest sheet). Cost to issue should be blossom out over the life of the note (capitalized as asset in the balance sheet and amortized over life of note).