Question

On December 31, 2017, Vaughn Company acquired a computer from Plato Corporation by issuing a $595,000 zero-interest-bearing note, payable in full on December 31, 2021. Vaughn Company’s credit rating permits it to borrow funds from its several lines of credit at 12%. The computer is expected to have a 5-year life and a $75,000 salvage value.

1-Prepare the journal entry for the purchase on December 31, 2017

2-Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective-interest method) on December 31, 2018 (To record the depreciation.) (To amortize the discount.) ( Schedule of note discount amortization)

3-Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.(To record the depreciation.)(To amortize the discount.) 3-

Answer 1

1) First solve the present value of the computer

FV = $595,000

I = 12%

T = 4 years

PVF(4,12) = 0.635518

Present value = ($595,000 × 0.635518)

Present value = $378,133.21rounded to $378,133

		Debit	credit
31- dec-2017	computer equipment	$378,133
	Discount on note payable	$216,867
	Note payable		$595,000

2) to calculate depreciation expense

(Pv computer - Salvage value)

($378,133 - $75000)/5

= $ 60,626.6

		Debit	Credit
31-dec-2018	Depreciation expenses	60,626.6
	Accumulated depreciation computer		60,626.6
31-dec-2018	interest expense	45,375.96
	Discount on note payable(W.N-1)		45,375.96

Working note (W.N)

1)

12/31/2017		$378,133
12/31/2018	45,375.96	$423,508.96
12/31/2019	50,821.07	$474,330.03
12/31/2020	56,919.60	$531,249.63
12/31/2021	63,749.95	$595,000 (rounded)

C)

		Debit	credit
31-dec-2019	depreciation expense	60,626.6
	Accumulated depreciation computer		60,626.6
31-dec-2019	interest expense	50,821.07
	Discount on note payable		50,821.07