If an asset is purchased by giving a non-interest-bearing note payable, the use of an unrealistically low interest rate will cause the asset to be recorded at a cost that is too low and the interest expense amount reported on the income statement also will be too low.

Question

Quizplus · Accepted Answer

The use of an unrealistically low interest rate in accounting for a non-interest-bearing note payable will actually cause the asset to be recorded at a cost that is too high, not too low, because the present value of the note payable will be higher. Conversely, the interest expense reported over time will be higher as well, not lower, because the difference between the recorded payable and the cash to be paid in the future represents interest expense.

If an Asset Is Purchased by Giving a Non-Interest-Bearing Note