Baxter Company purchases used equipment from Grant Company, issuing a non-interest-bearing, $10,000, 5-year note in exchange. Baxter uses an incremental borrowing rate of 12%. The present value of $10,000 to be repaid at the end of five years at 12% is $5,674.27. Baxter Company will record this exchange with

1. a debit to Cash for $5,674.27.
2. a debit to Equipment for $10,000.
3. a credit to Discount on Notes Payable for $4,325.73.
4. none of these choices.