Introduction
Wie company is celebrating two years of existence in the competitive sports production industry. The company wishes to thank its stakeholders for the corporation and hard work inputted during the short-term business period. The organization has made significant progress since its launch and dreams of better future achievements. Today, an expansion team has been selected to gear the company’s prospects, and the institution is happy to announce its intention to expand its production line. However, the agency owner Michelle Wie does not have enough resources to meet the company’s demand; the money raised from cash flows and those donated by the investor cannot complete the expansion project. The business needs some borrowing for the expansion plans because it lacks adequate resources to run the project. Nevertheless, settling on a zero-coupon bond would play a vital role in the borrowing scheme.
Authoritative Literature on Zero-Interest-Bearing Note
Zero-interest-bearing notes are debt instruments issued by organizations lacking coupon rates. If issued by Wie Company, the firm will not be liable for any form of periodic interest payments to the investors. As an experienced certified public accountant, I would advise Michelle Wie to accept the zero-interest-bearing note because the instruments are offered using significant discounts to the face values rather than periodic discounts. One advantage of issuing a zero-interest-bearing note lies in its fixed maturity periods. For example, Wie Company will enjoy the financial gains acquired from the zero-interest-bearing note without repayment of any interest until five years have elapsed. However, at the end of the maturity, the corporation will be obligated to repay the $50000 to investors through a discount.
Determination of Present Value
The zero-coupon bond applies in the prediction of present value when the ready market and exchange prices are missing. In this case, Wie Company might be compelled to purchase a lower note with a price tag lower than its face value. The accounting department is advised to determine the note’s present value at the end of maturity because, at this point, the face value shall have been repaid fully. The resulting interest rate in such instances is often called the Zero-coupon.
Discounts and Premiums
The accounting team should have exemplary recordings on the firm’s balance sheets to successfully attain the company’s borrowing. Discounts or premiums are essential sections of a flat sheet, and they should appear either as a direct deduction or an addition to the face amounts included in any note. The premium or discount values should be reported on the liability sections of the balance sheet to ease the isolation of the per values and payable bonds in the upcoming financial periods.
Conclusion
A zero-interest-bearing note is a tool used in acquiring debts from various investors. The commitment instrument uses the face amounts of zero interest as the present values of bearings. The calculations of discounts depend on the issuing price and the redeemable face values accrued by investors.
- The income of the investor = Face valued redeemed – issue price.
- Face value = is the implication of a note.
- Issue Prices = are the shares available for sale.
- Discount = is the investor’s income.
The expert team prioritizes zero-interest-bearing notes because they do not want to bear the expenses of annual periodic interests. Enforcing the zero-interest-bearing note strategy in borrowing would help the organization to meet its production line expansion.