Question

Problem 14-8 On December 31, 2017, Flint Company acquired a computer from Plato Corporation by issuing a $557,000 zero-interest-bearing note, payable in full on December 31, 2021. Flint Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a $63,000 salvage value.

Your answer is partially correct. Try again. Prepare the journal entry for the purchase on December 31, 2017. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2017 SHOW LIST OF ACCOUNTS LINK TO TEXT

Your answer is partially correct. Try again. Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective-interest method) on December 31, 2018. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2018 (To record the depreciation.) December 31, 2018 (To amortize the discount.) Schedule of Note Discount Amortization Date Debit, Interest Expense Credit, Discount on Notes Payable Carrying Amount of Note 12/31/17 $ $ 12/31/18 12/31/19 12/31/20 12/31/21 SHOW LIST OF ACCOUNTS LINK TO TEXT

Answer 1

Calculation of Purchase Price of Computer:-

Consideration of $557,000 for Computer is paid by way of Zero-Interest bearing Note which is payable on 31st December 2021.

Therefore, Purchase Price = $557,000/(1+Discount Rate)4 = $557,000/(1+10%)4 = $557,000*0.68301

Purchase Price = $380,437

Depreciation per annum = ($380,437 - $63,000)/5

Depreciation per annum = $63,487

Discount on Notes Payable = $557,000 - $ 380,437

Discount on Notes Payable = $176,563

Journal Entries for the year ended on 31st December 2017 and 2018 are as follows.

Date	Account Titles and Explanation	Debit	Credit
12/31/2017	Computer	380,437
	Discount on Notes Payable	176,563
	Zero-Interest Bearing Notes		557,000
	(Being Computer purchased by issuing Notes)
12/31/2018	Depreciation Expense Account	63,487
	Computer		63,487
	(Being depreciation of Computer recorded)
12/31/2018	Interest Expense	38,044
	Discount on Notes Payable		38,044
	(Being discount on notes amortised)

Schedule for Amortisation of Discount on Notes Payable using Effective Interest Method.
Year ending on	Opening Balance (Net)	Amortisation Amount	Closing Balance (Net)
31st December 2017	3,80,437	-	3,80,437
31st December 2018	3,80,437	38,044	4,18,481
31st December 2019	4,18,481	41,848	4,60,329
31st December 2020	4,60,329	46,033	5,06,362
31st December 2021	5,06,362	50,638	5,57,000
Note : Amortisation amount is 10% of Net opening Balance