Final answer:
To record the purchase of the truck with a zero-interest-bearing note, one must calculate the present value of the note at the market rate of 10% and record the truck at the present value, with the discount on notes payable balancing the entry and notes payable recorded at face value.
Step-by-step explanation:
The student asked how to record the purchase of a truck when Tamarisk Corporation acquired it by issuing an $118,400, 4-year, zero-interest-bearing note to Equinox Inc, considering a market interest rate of 10%. To account for the transaction, two key figures must be determined: the present value of the note and the discount (or interest expense) that will be amortized over the life of the note.
The present value (PV) of the note can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value of the note ($118,400), r is the market interest rate (10% or 0.10), and n is the number of periods (4 years). Plugging in the values, we get PV = $118,400 / (1 + 0.10)^4, which calculates to a present value.
Once we have the present value, the journal entry at the time of the truck's purchase would be:
- Debit: Truck (at present value)
- Debit: Discount on Notes Payable (to balance)
- Credit: Notes Payable (at face value of $118,400)
Over the 4-year period, Tamarisk Corporation will amortize the discount on notes payable, which will increase the carrying value of the note to its face value and recognize the implied interest expense.