AMC issues a note with no stated interest rate in exchange for a machine. In accounting for the transaction:
A) The machine should be depreciated over the note's term to maturity.
B) If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest.
C) Both the note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable.
D) The note is recorded at its face amount unless the fair value of the machine is readily available.

Question

Quizplus · Accepted Answer

When the interest rate on a note is not stated explicitly, it is considered to be a zero interest rate note or a note with an implicit rate of interest. In such cases, the present value of the note needs to be computed using the market rate of interest and discounted back to the date of issuance. This is done because the present value of the note represents the cash value of the machine that was exchanged. Therefore, the note should be recorded at its present value, which represents the fair value of the machine. The machine should then be recorded at the fair value of the asset or the face amount of the note, whichever is more clearly determinable.

AMC Issues a Note with No Stated Interest Rate in Exchange