Question

27

An asset is acquired using a noninterest-bearing note payable for $225,000 due in three years. Which of the following statements most likely is correct?

Multiple Choice

• The fair value of the asset is less than $225,000.

• All of the other answer choices are correct.

• The total amount paid for the asset will be less than $225,000.

• No interest expense will be reported over the three-year note.

Answer 1

Answer:

Option A: Fair value is less than $ 225,000

Explanation:

• A non-interest bearing note refers to a bond or a note which is issued at a discount but repaid or matures at face value.
• Contrary to its name, the non-interest bearing notes carry interest.
• The interest is the amount of difference between the issue price and the face value.
• For example: An asset is purchased for $ 200,000 and a non-interest bearing note is issued with a face value of $ 225,000, payable after 3 years. So, $ 25,000 will be the interest.

In this question, option A is correct as the fair value of asset is less than $ 225,000. Also, the total amount paid for the asset will be $ 225,000 and interest expense will be reported over 3 year period.

Hence,

Option 'A' is correct and rest all are incorrect.

In case of any doubt, please feel free to comment.