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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Value of a Note

You have just been promoted to manager at a national CPA firm. A new accountant approaches you with the following situation: He has discovered that the president of your client’s company has a brother who is both the major shareholder and the president of a local bank. Your client has a $300,000, 5-year note payable to the bank at 4% interest compounded annually. Because the going interest rate is 16%, the accountant suggests that the note be recorded at its present value using this going rate. The president says that the effective liability is $300,000 and should be reported on the balance sheet at this figure. The note was issued on January 1, 2019, and is due on January 1, 2024.

Required:

  1. 1. Explain who is correct.
  2. 2. At what amount should the company have valued the note on January 1, 2019, assuming that the accountant’s assessment is correct?

1.

To determine

Identify whether president or accountant’s assessment is correct.

Explanation

In this case, it is not disclosed that how the note payable has been exchanged. Hence, both the argument may be correct on the following circumstances.

The president’s assessment is correct, if the note was purely exchanged for cash borrowings...

2.

To determine

Identify the amount at which the client  have valued the note on January 1, 2019, assuming that the accountant’s assumption is correct.

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