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

Given that Party Glitter given loan of $300,000 to FIX 92, a local radio station and the borrower agreed to sign on a non interest bearing note with value $300,000 to be repaid after 3 years. Also, the borrower agreed to give free radio advertising to the Party Glitter over these three years.

After going through the given facts, it is evident that the loan was given without any interest component. But the consideration isn't nil in the given case. There is consideration in the non cash form and it is provided by way of free advertising by the borrower. The advertising is the consideration for the given loan transaction.

To quantify the consideration for loan, we have two options.

1. The consideration for the loan given by lender will be same amount the borrower will get if these advertising services are provided to any unrelated party for three years

2. The consideration can also be calculated by taking the interest rate which is prevalent in the market and at which the lender will lend $300,000 to any other unrelated party.

We have to select the option which is more evident and reliable to calculate the consideration for loan. (Implied interest)

After obtaining this consideration, we value the loan using the appropriate discount rate (cost of capital of lender) by discounting the consideration and the original loan amount (which will be repaid after 3 years).

The free advertising provided by the radio station will be treated as interest expense after finding the value of such consideration using above method.