Question

Smith company acquires equipment by signing a noninterest-bearing note payable requiring the future payment of 20,000. The present value of the note payable is15,000. Assuming Smith uses a contra account, Smith should record (Select all that apply.)

1) credit note payable $20,000
2) debit machine $20,000
3) debit discount on note payable $5,000
4) credit note payable $15,000
5) debit machine $15,000

Answer 1

Smith company should make the following accounting entries: debit equipment for $15,000, credit note payable for $20,000, and debit discount on note payable for $5,000.

Step-by-step explanation:

When Smith company acquires equipment and signs a noninterest-bearing note payable with a future payment of $20,000 and a present value of $15,000, using a contra account to record this transaction involves the following entries:

• Debit equipment (asset account) for the present value of the note payable: $15,000.
• Credit note payable for the future value due on the note: $20,000.
• Debit discount on note payable (contra liability account) for the difference between the present value and the future value: $5,000.

The correct journal entries are a debit to the equipment account because the company is acquiring an asset, a credit to the note payable for the total amount that will be due in the future, and a debit to the discount on note payable account, which represents the difference between the present value and the future value. Over time, this discount will be amortized to interest expense, reflecting the cost of borrowing over the life of the note.