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Ayayai Corporation purchased a truck by issuing an $110,400, 4-year, zero-interest-bearing note to Equinox Inc. The...

Ayayai Corporation purchased a truck by issuing an $110,400, 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
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Answer #1

Solution

Ayayai Corporation

Entry to record purchase of truck financed by notes payable:

Date

Account Titles and Explanation

Ref. No.

Debit

Credit

Truck

$78,210

Discount on Notes Payable

$32,190

Notes Payable

$110,400

Computations:

Determination of the price of note:

Price of note, P = face value of the note/(1+i)n

Face value of note = $110,400

N = period = 4 years

Market Interest rate = 9%

P = 110,400/(1+ 0.09)4

Price of note = $78,210

Discount on note = face value – price of note

= $110,400 – 78,210 = $32,190

Explanation:

A zero-interest bearing note refers to a debt instrument which does not involve periodic interest payments. However, the note is issued at a discounted value and at maturity the issuer pays the face value to the holder of the note. The amount of discount is computed using the prevailing market rate of interest for similar instruments.

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