What I don't understand from the following below is why if i am accounting for a non-interest bearing note that I would not treat this accounting similar to that of a zero coupon bond (amortization of discount). I feel like the economics are such that it is more of a discount amort than an actual payout of interest income, any thoughts?

Question CPA-00759

On January 1, Year 1, Mill Co. exchanged equipment for a $200,000 noninterest bearing note due on January 1, Year 4. The prevailing rate of interest for a note of this type at January 1, Year 1, was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mill's Year 2 income statement?

a. $0

b. $15,000

c. $16,500

d. $20,000

Choice "c" is correct. $16,500 interest for Year 2.

This transaction is NOT a nonmonetary transaction; it is an exchange of equipment for a non-interest bearing note receivable, which is a transaction like exchanging equipment for CASH. The exchange is clearly a monetary exchange, which is the culmination of the earnings process and which is recorded using the fair value of the asset (the equipment or the note, in this case) with the more readily available fair value. In this question, the fair value of the note is more readily available (the fair value of the equipment is not even given in the fact pattern). The interest to be recorded is calculated as follows: