Truck #2 has a list price of $20,000 and is acquired for a down payment of $2,500 cash and a zero-interest-bearing note with a face amount of $17,500. The note is due April 1, 2018. Culver would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.

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Business

Amiya Hensley

11 September, 06:57

Truck #2 has a list price of $20,000 and is acquired for a down payment of $2,500 cash and a zero-interest-bearing note with a face amount of $17,500. The note is due April 1, 2018. Culver would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.

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Travis Wu · Answer 1

Dr Trucks 18,555

Dr Discount on Notes Payable 1,445

Cr Cash 2,500

Cr Notes Payable 17,500

Explanation:

Since the seller accepted a zero interest bearing note, that is equivalent to making a discount. To determine the discount on the note, we have to calculate the present value of the note: discount rate is 9% and present value is $17,500

present value of the note = $17,500 / (1 + 9%) = $16,055

discount on the note = $17,500 - $16,055 = $1,445

So the purchase price of the truck would be:

$2,500 down payment + $16,055 = $18,555