Question

An asset is acquired by signing a noninterest-bearing note payable. The interest rate on the note is unknown; however, the fair value of the asset is available from price lists and previous purchases. How should the asset be valued?

1) At the book value of the asset on the date of exchange.
2) At the net present value of the asset on the date acquired.
3) At the fair value of the asset.
4) At the present value of the note discounted at the risk-free rate.

Answer 1

The asset should be valued at the fair value, which represents the current market price based on available information from price lists and previous purchases.

Step-by-step explanation:

When an asset is acquired by signing a noninterest-bearing note payable and the interest rate for the note is unknown, the asset should be valued at the fair value of the asset. This valuation is based on price lists and previous purchases, which reflects the price at which the asset can be exchanged in a current transaction between willing parties. Since the interest rate is unknown, the book value or the net present value would not be appropriate. Instead, fair value is the most relevant measure as it represents the current market value of the asset.