What is the resulting interest rate called? B It would be classified as a noncurrent receivable regardless of the date or operating cycle. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. C The net method requires the sales discounts forfeited to be calculated, which requires math too complex for most accountants. However, this paragraph provides the following general guidelines: c. The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. Keegan developed a new photo technology, which Ranton Industries has arranged to purchase. What is the present value of the note receivable? This subtopic also provides links to guidance on the recognition of interest income and interest expense for specific transactions and specific instrument types.
Portion of the codification are cut and pasted into the document for you. Example The Internal Revenue Service provides an example of the calculation. Generally only investments with original maturities of 3 months or less qualify under these definitions. At maturity, you collect the last interest payment and receive the face value of the debt you purchased. This is supposed to prevent exploitation of taxable income. C by means of footnotes only.
Use an Excel function to compute the rate. Zero-Coupon Debt A zero-coupon bond or note pays no interest until its maturity date. To estimate the present value of a note under such circumstances, an applicable interest rate is approximated that may differ from the stated or coupon rate. Unless you hold the note in a tax-deferred account, you must pay tax on the imputed interest each year. D future amount of an ordinary annuity of 1 table should be used. But craftsmen like you always need wood. Non interest bearing are issued by a business for cash, and are liabilities representing amounts owed by the business to a third party.
Examples are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs. By continuing to use this website, you agree to the placement of these cookies and to similar technologies as described in our. B The present value will be larger the closer the present date is to the future value date. The interest is implied in the face value of the note. Identify the authoritative literature that provides guidance on the zero-interest-bearing note.
C They have been collateralized. Non interest bearing note payable — discount amortized Account Debit Credit Interest expense 61 Discount on notes payable 61 Total 61 61 At the end of the term, all the discount has been amortized as an expense to the income statement, the balance on the discount on notes payable account is zero, and the balance on the non interest bearing notes payable account is reduced to zero when payment of the face value is made to the lender. Where should a discount or premium appear in the financial statements? A At face amount less implicit interest. B Northern Pine will have no interest revenue from this note because it is zero-interest-bearing. How about if I pay you in wood-enough for mine and three others. C If would be classified as a noncurrent receivable if the current year or operating cycle includes the next 10 months. A noninterest-bearing note works the same way a discounted bond works.
Imputed Interest The adjusted acquisition price of a zero-coupon note is initially equal to its purchase price at issue. Imputed Interest Rate If there were to be a known interest rate for note, you could find the present value of the equipment by discounting it at that specific rate. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. This Subtopic provides guidance for the appropriate accounting when the face amount of a note does not reasonably represent the present value of the consideration given or received in the exchange. 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. Add Remove Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers.
How is Imputed Interest Calculated? Each month a portion of the discount on the notes payable is amortized as an interest expense. The discount is amortized over the lifetime of the notes. Thomas is planning to start his own business in 10 years, at which time he will buy all the equipment and land needed. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. If neither the fair value of a nonmonetary asset transferred nor the fair value of a nonmonetary asset received in exchange is determinable within reasonable limits, the recorded amount of the nonmonetary asset transferred from the entity may be the only available measure of the transaction. After the note matures the entire face value is repaid.