Question

Saunders Company purchased equipment by signing a noninterest-bearing note of $21,000 with payment due in three years. The equipment is custom-built, so its cash price is unavailable. Using a rate of 9%, which reflects the appropriate interest rate for a loan of this type of loan, the present value of the note is $16,216.

Prepare the appropriate journal entry to record the purchase of the equipment.

Answer 1

	Notes payable	$        21,000
Less:	Present value of the note	$        16,216
	Discount on notes payable	$          4,784

Date	Account title and explanation	Debit	Credit
Date of Purchase	Equipment	$        16,216
	Discount on notes payable	$          4,784
	Notes payable		$        21,000
	To record the purchase of the equipment by signing a noninterest-bearing note.