Wize University Introduction to Financial Accounting Textbook > Long-Term Assets
Assets purchased with Zero-interest Notes
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Assets Purchased with Zero-interest Note
A note that does not require the borrower to pay the lender any amount of interest is called a zero-interest note or a non-interest bearing note.
Purchasing an Asset
- Asset is valued at the present value of the future payment - not the "face value" of the note.
- Interest expense is still incurred by the borrower, this is called imputed interest.
- Interest is incurred and the present value is calculated based on the market interest rate.
The Present Value Factor Table
- Contains the present value of $1 for each combination of interest and time.
- Multiply note payable by the present value factor to find the present value of the note.
- Look up the number of periods and the periodic interest rate in the 'Present Value of $1' table
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Example: Asset Purchased with Zero-Interest Note
Wize Corp. purchased a new machine by signing a zero-interest bearing note totalling $100,000. The note will be repaid in 3 years, and the company's implied interest rate is 7%.
Prepare the journal entry to record the purchase of the machine.
Practice: Assets Purchased with Zero-Interest Note
ABC Inc. purchased a new building for $600,000. The developer of the real estate accepted the company's zero-interest bearing note, payable in 7 years. The company's implied interest rate is 8% per year.
Prepare the journal entry to record the acquisition of the building.
Round present value factors to 4 decimal places, round final answer to the nearest dollar.
Transactions:
| Account | Debit | Credit |
|---|---|---|
Present Value of $1 Factor Table
