Question

Tamarisk Corporation purchased a truck by issuing an $118,400, 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.

Answer 1

Answer:

Dr. Truck                $80,869

CR. Note Payable $80,869

Explanation:

Note issued is a liability instrument. It is a promise of payment f principal amount and interest after a specific period of time. Zero interst interest bearing not does not offer any interest payment but it is issued at a discounted price . Present value of Note payable is the value that should be recognised as a cost of the truck.

Now calculate the present value of the Note.

PV of Zero coupon bond = FV / ( 1 + r )^n

Where

FV = FV maturity value of the note = $118,400

r = Interest rate = 10%

n=  numbers of period = 4 years

Placing Values in the formula

PV of Zero coupon bond = $118,400 / ( 1 + 10% )^4

PV of Zero coupon bond = $80,869