On July 1, 2021, Markwell Company acquired equipment. Markwell paid $185,000 in cash on July 1, 2021, and signed a $740,000 noninterest-bearing note for the remaining balance which is due on July 1, 2022. An interest rate of 6% reflects the time value of money for this type of loan agreement. Which of the following should be included in the journal entry on July 1, 2021?

a. Credit: Notes payable, $698,116.
b. Debit: Equipment, $925,000.
c. Debit: Discount on notes payable, $41,884.
d. Credit: Notes payable, $698,116 and Debit: Discount on notes payable, $41,884.

c. Debit: Discount on notes payable, $41,884.

Explanation:

The journal entry is shown below:

Equipment    $883,116  

Discount on Notes payable $41,884  ($740,000 - $698,116)

        To Notes payable       $740,000  

        To Cash                       $185,000

(Being the amount paid in cash and note payable is recorded)

Working note

= Note payable amount × PVF factor at 6% for one year

= $740,000 × 0.94340

= $698,116

For recording this we debited the equipment as it increased the assets and discount is always debited while the note payable and cash is credited as it increased the liabilities and reduced the assets

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