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?

Question

BlackTom AI · Accepted Answer

Question restatement: 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?

Option 1: 'The fair value of the asset is less than $225,000.' This is the correct conceptual result. Because the note is noninterest-bearing, the stated future payment ($225,000) includes implicit interest. The asset should be recorded at its fair value, which is the present value of the $225,000 due three years from now discounted at an appropriate market rate. Since the present value is typically less than the face amount, the fair value of the asset is indeed less than $225,000. The difference represents interest that will be recognized over time via amortization of a discount on the note.

Option 2: 'No interest expense will be reported over the three-year note.' This is incorrect. Even though the note itself bears no explicit interest, interest is still implicit in the arrangement. Under the effective-interest method, interest expense is recorded over the three years as the carrying amount of the note is amortized up to $225,000, so interest expense is indeed reported.

Option 3: 'The total amount paid for the asset will be less than $225,000.' This is also incorrect. The total cash outlay at the time of settlement will be $225,000, even though the asset’s initial recognition uses a fair value less than 225,000. The note’s face value is $225,000, and that is the amount that will be paid at maturity; accounting for present value does not change the fact that the cash payment is $225,000.

Option 4: 'All of the other answer choices are correct.' Since options 2 and 3 are incorrect, this statement cannot be true. Therefore, it is not the correct choice.

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?

View Explanation

Log in for full answers

Similar Questions

On November 1, Alan Company signed a 120-day, 9% note payable, with a face value of $60,000. Alan made the appropriate year-end accrual. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.)

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler