4. Please provide FASB citation....Miller Company has been operating for just 3

Question

4. Please provide FASB citation....Miller Company has been operating for just 3 years, producing specialty ski equipment. To date the company has been able to finance its operations with investments from its principal owner, Bode Miller, 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, Miller 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, Miller’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. Prepare a formal business memo to the CFO, Lindsey Vonn, including responses to the following questions. Be sure to 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? What about issue costs?

Explanation / Answer

CFO Lindsey Vonn
Sir, I have mentioned the points which we have to take into consideration while acquiring equipment in exchange of non interest bearing bond of $50000 for 5 years
ASC 835 provides the authoritative literature that provides the guidance on zero interest bearing note. The literature is as follows from ASC 835
When a note is exchanged for property, goods, or service if (1) interest is not stated, or (2) the stated interest rate is unreasonable or (3) 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. In these circumstances, the note, the sales price, and the cost of the property, goods, or service exchanged for the note should be recorded at the fair value of the property, goods, or services or at an amount that reasonably approximates the market value of the note, whichever is the more clearly determinable. That amount may or may not be the same as its face amount, and any resulting discount or premium should be accounted for as an element of interest over the life of the note . In the absence of established exchange prices for the related property, goods, or service or evidence of the market value of the note, the present value of a note that stipulates either no interest or a rate of interest that is clearly unreasonable should be determined by discounting all future payments on the notes using an imputed rate of interest. It is determination should be made at the time the note is issued, assumed, or acquired; any subsequent changes in prevailing interest rates should be ignored.
So it is recoded on a fair value of $50000 and has to be discounted in imputed interest rate to arrive at present value.
b) To estimate the present value of a note when an established exchange price is not determinable and a note has no ready market, an applicable interest rate is approximated which may differ from the stated or coupon rate. This process of approximation is frequently called imputation, and the resulting rate is often called an imputed interest rate. Nonrecognition of an apparently small difference between the stated rate of interest and the applicable current rate may have a material effect on the financial statements if the face amount of the note is large and its term is relatively long.
The interest rate is called imputed interest rate.
c) Discount and premium available is amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.
d) Issue costs should be reported in the balance sheet as deferred charges.

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