WGU D103 - INTERMEDIATE ACCOUNTING - OA2 (UNITS 5-7) 2025

A company issues a five-year zero-interest-bearing note for a new lathe it purchased for $25,000. The market rate of interest at the time the note was issued is 4%. Assuming an annual interest rate of 4% for five years is appropriate, the present value of the principal is $25,000 × 0.82193 = $20,548. Assuming an annual interest rate of 5% for 4 years is appropriate, the present value of the principal is $25,000 × 0.82270 = $20,568.

What amount should be recorded for the cost of the lathe? CORRECT -The lathe is recorded at its present value of $20,548. No calculation is required.

Accounting Rule: An asset acquired in exchange for a noninterestbearing note is valued at the present value of the note.

Equipment is exchanged for a noninterest-bearing note. Payment of $20,000 on the note is to be made in one year. The market rate for notes of similar risk is 5%. Assuming an annual interest rate of 5% is appropriate, the present value of the principal is $20,000 × 0.95238 = $19,048. Assuming that a semiannual interest rate of 2.5% is appropriate, the present value of the principal is ($20,000/2) × 1.92742 = $19,274.