Saunders Company purchased equipment by signing a noninterest-bearing note of $21,000 with payment due in three years. The equipment is custom-built, so its cash price is unavailable. Using a rate of 9%, which reflects the appropriate interest rate for a loan of this type of loan, the present value of the note is $16,216.

Prepare the appropriate journal entry to record the purchase of the equipment.

Question

Amber Bass

Business

19 October, 21:41

Saunders Company purchased equipment by signing a noninterest-bearing note of $21,000 with payment due in three years. The equipment is custom-built, so its cash price is unavailable. Using a rate of 9%, which reflects the appropriate interest rate for a loan of this type of loan, the present value of the note is $16,216.

Prepare the appropriate journal entry to record the purchase of the equipment.

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Matthew Hicks · Answer 1

Equipment $ 16,216 (debit)

Note Payable $ 16,216 (credit)

Explanation:

The Present Value of the Note is used as the measurement Cost of the Equipment

From this value we would subsequently calculate the depreciation as the equipment is being used.

The Note Payable will be amortised over three years to reflect the Carrying amount of the Liability