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?