Question

The Parry Glitter Company recently loaned $300,000 to FIX 92, a local radio station. The radio station signed a noninterest-bearing note requiring the $300,000 to be repaid in three years. As part of the agreement, the radio station will provide Parry with a specified amount of free radio advertising over the three-year term of the note.

The focus of this case is the valuation of the note receivable by Parry Glitter Company and the treatment of the "free" advertising provided by the radio station. The mission of this discussion is to reach a consensus on the appropriate note valuation and accounting treatment of the free advertising.

Answer 1

The Parry Glitter Company

The Parry Glitter Company should record the Notes Receivable as $300,000.

It should also record the interest receivable per year as $24,000 and the advertising cost as $24,000 per year. These bring into the accounting records the interest revenue and also the advertising expense, which eventually cancel each other.

Explanation:

a) Data and Calculations:

Notes Receivable = $300,000

If the notes receivable are repaid at the end of 3 years and it is assumed that the interest on the notes receivable = 8%

Therefore, the cost of the free advertising will be equal to $24,000 ($300,000 * 8%), which is the cost of the interest to the radio station.