1.Notes Payable

Your client has been operating for just two years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner 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, the company 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, the client 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.

(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?