4. Miller Company has been operating for just 3 years, producing specialty ski e

Question

4. 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

C ) The discount or premium resulting from the determination of present value in cash or non-cash transactions is not an asset or liability separable from the note which gives rise to it. Therefore, the discount or premium should be reported in the balance sheet as a direct deduction from or addition to the face amount of the note.

It should not be classified as a deferred charge or deferred credit. The description of the note should include the effective interest rate; the face amount should also be disclosed in the financial statements or in the notes to the statements.ix9 Amortization of discount or premium should be reported as interest in the statement of income. Issue costs should be reported in the balance sheet as deferred charges.

B )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

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