Question

A company acquires equipment by signing a note payable. If the note does not bear interest, the company should record the equipment at the?

1) present value of the equipment or note
2) future value of payments on the note payable
3) maturity value of the note payable

Answer 1

The equipment should be recorded at the present value of the note payable when signing a note that does not bear interest, reflecting the current worth of the equipment.

Step-by-step explanation:

When a company acquires equipment by signing a note payable that does not bear interest, the equipment should be recorded at the present value of the note. The present value reflects the current value of a future amount at a specific interest rate before it has actually been received. If a $3,000 bond issued at 8% is taken as an example, the present value is $3,000, which is the amount the borrower receives and agrees to repay to the lender. This is similar for the acquisition of equipment; it is the amount equivalent to what the receiver is willing to exchange for the equipment currently, rather than what will be paid in the future.