Koepka Inc. has been operating for a few years, providing high end golf equipmen
ID: 2560129 • Letter: K
Question
Koepka Inc. has been operating for a few years, providing high end golf equipment.To date the company has financed its successful operations with investments from its owner, Brooks Koepka, as well as CFO. Expansion plans will require some borrowing. Some equipment will be financed with a zero-interest bearing note. The note matures in 5 years and has a maturity value of $50,000. No reliable fair value measure for the equipment is available. Therefore they are unable to establish an exchange price to record the equipment. Providing Codification references for all your responses, answer the following:
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 called?
C. Where should a discount or premium appear in the financial statements?
Explanation / Answer
1.
As per codification topic 835-30 , this standard applies as it is in relation to the zero-interest bearing note with exchange of equipment.
Some examples are:
Example 1: Note payable
Received $1,000 in cash and issued a $1,100 note payable
Present value = $1,000
Face amount = $1,100
Discount on note payable = $100
$100 is recognized as interest expense over the period
Example 2: Note receivable
Paid $1,800 in cash and received a $2,000 note receivable
Present value = $1,800
Face amount = $2,000
Discount on note receivable = $200
$200 is recognized as interest income over the period
2.
Note exchanged for noncash assets
Cost of the asset = fair value of the asset or market value of the note (whichever is more clearly determinable)
in this case it is $50000
3.
If cost of the asset < face amount of the note
the difference is discount
discount is amortized using "interest method"
Amortization of discount
interest expense for note payable
interest income for note receivable
Premium is added to the face amount of the note
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.