Long-Term Notes Payable
Response to the following problem:
Business transactions often involve the exchange of property, goods, or services for notes or similar instruments that may stipulate no interest rate or an interest rate that varies from prevailing rates.
Required
1. When a company exchanges a note for property, goods, or services, what value does it place on the note:
a. If it bears interest at a reasonable rate and is issued in a bargained transaction entered into at arm's length? Explain.
b. If it bears no interest and/or is not issued in a bargained transaction entered into at arm's length? Explain.
2. If the recorded value of a note differs from the face value:
a. Explain how the company should account for the difference.
b. Explain how the company should present this difference in the financial statements.