Bengro purchased a tractor for its farming operations. The tractor had a list price of $400,000 from the vendor. Bengro paid cash of $100,000 on the date of sale and signed a non-interest-bearing note payable to the vendor with a face amount of $340,000 due two years from the date of sale. The normal rate of interest on a similar note would be 10%.
Prepare Bengro’s journal entry on the date it purchased the tractor.
In order to record the transaction present value of notes payable is required, which is calculated as follows:
Present value = Future value / (1+rate)^years
= $340,000 / (1+10%)^2
= $280,992
So, the tractor account is debited with $380,992 ($280,992 + $100,000). Discount on note payable is the difference between future value and the present value of note that is, $59,008 ($340,000 - $280,992).
Required journal entry:
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