The difference between the face amount of a noninterest-bearing note payable used to acquire an asset and the note’s present value is initially recorded as a contra asset.
False
When a noninterest-bearing note payable is used to acquire an asset, the face amount of the note represents the amount that needs to be repaid to the lender at maturity. However, because the note does not accrue interest, the amount of money that needs to be repaid in the future is lower than the face amount of the note. This difference between the face amount of the note and its present value (which represents the amount of money needed to repay the note at maturity) is called unamortized discount.
To record this unamortized discount, the company creates a contra asset account called “Discount on Notes Payable” or “Notes Payable-Discounted” on the balance sheet. This account is subtracted from the face value of the note payable when calculating the company’s total liabilities.
Over time, the company amortizes or reduces the balance of the discount account as it makes payments on the note. The amortization of the discount account is recorded as interest expense on the income statement.
Overall, the use of a noninterest-bearing note payable can be a beneficial way for a company to acquire assets, as it may represent a lower cost of financing than other types of loans. However, it is important for the company to keep track of the unamortized discount and properly record it in their financial statements.
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