Intereste Expense Memo
Birdies Galore
From:
Carlos Campos
Date:
11/6/2013
Newly acquired Equipment -Accounting Procedure
To whom it May Concern,
I understand the accounting staff is unsure how to record interest expense over the life of the note and what interest should be applied. I will provide some insight and guidance based off my findings in the FASB Codification. I know that the note has a maturity value of $350,000 and matures in 5 year, let’s begin with what we know.
Proper way to account for the zero interest bearing note as shown in the FASB codification:
FASB:835-30-25-8 Notes exchanged for property, goods, or services are valued and accounted for at the present value of the consideration exchanged between the contracting parties at the date of the transaction in a manner similar to that followed for a cash transaction.
FASB: 835-30-05-2 Business transactions often involve the exchange of cash or property, goods, or service for a note or similar instrument. When a note is exchanged for property, goods, or service in a bargained transaction entered into at arms length, there should be a general presumption that the rate of interest stipulated by the parties to the transaction represents fair and adequate compensation to the supplier for the use of the related funds. That presumption, however, must not permit the form of the transaction to prevail over its economic substance and thus would not apply if interest is not stated, the stated interest rate is unreasonable, or the stated face amount of the note is materially different from the current cash sales price for the same or similar items or from the fair value of the note at the date of the transaction. The use of an interest rate that varies from prevailing interest rates warrants evaluation of whether the face amount and the stated interest rate of a note or obligation provide reliable evidence for properly recording the exchange and subsequent related interest.
So we know if interest is not stated than it does not represent fair and adequate compensation to its related fund. In our case interest is not stated and we will have to use a different approach in computing the present value of your equipment and we will be using the imputed interest method:
FASB: 835-30-25-3 If an established exchange price is not determinable and if the note has no ready market, the problem of determining present value is more difficult. 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. This process of approximation is called imputation, and the resulting rate is called an imputed interest rate. Non-recognition of an apparently