Koepka Inc. has been operating for a few years, providing high end golf equipmen
ID: 2793336 • 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
A The literature says that you value assets acquired by the value of the assets.If you don't know it,you are supposed to figure it out,if possible,by looking at the cash price you could have paid(but didn't). Or,if there is no just way to figure it out reasonably,then you look at the fair value of the item traded,in this case 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 is not immediately apparently because you don't have an interest rate to use it to discount it back to the present value. So,you have to impute an interest rate(whole,other section in the codification). Another level of difficulty valuing an asset exchange would be when a firm leases,rather then sells their inventory.What is the selling price?The present value of minimum future rentals are used to establish a likely selling price for the purpose of recording the sales and gross profit from the sales
B You have to decern an interest rate by looking prevailing interest rate for similar instruments with firms of similar credit status to this one.This is called imputed interest rate.
C. The discount or premium is a contra account to the note receivables on the issuer's book(reduces asset in the balance sheet)
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