Question

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

Short answer

Truck amount is debited by $54,641, discount on note payable is debited by $25,359 and notes payable is credited by$80,000 to record the purchase of truck

Step-by-step solution

Calculation of present value of note

$\begin{array}{rcl}\mathbf{PresentValueofNotePayable}& \mathbf{=}& \mathbf{NotePayable}\mathbf{\times }\frac{\mathbf{1}}{{\left(\mathbf{1}\mathbf{+}\mathbf{r}\right)}^{\mathbf{N}}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{1}}{{\left(\mathbf{1}\mathbf{.}\mathbf{10}\right)}^{\mathbf{4}}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{54}\mathbf{,}\mathbf{641}\\ & & \end{array}$

Journal entry of purchase of truck

Date	Particulars	Debit ($)	Credit ($)
	Trucks	$54,641
	Discount on note payable ($80,000- $54,641)	$25,359
	To Notes payable		$80,000
	To record the purchase of truck