Novak Corporation purchased a truck by issuing an $113,600, 4-year, zero-interes

Question

Novak Corporation purchased a truck by issuing an $113,600, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 9%. Prepare the journal entry to record the purchase of this truck. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(dr) Trucks XX

(dr) Discount on Notes payable XX

(cr) Notes Payable XX

Explanation / Answer

first let us calculate the price of truck,

price of truck = value of notes payable * relevant discounting factor.

here,

value of notes payable = $113,600.

relevant discounting factor = 1 /(1+r)^n

here,

r = 9% =>0.09.

n = 4 years.

=> 1 /(1.09)^4

=>0.70843

value of truck = $113,600 * 0.70843

=>$80,478.....(rounded to nearest dollar).

the following will be the journal entry:

Trucks a/c .............Dr $80,478 Discount on Notes payable a/c............Dr $33,122 ............To Notes payable a/c $113,600

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