Question

(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entry for purchase on December 31, 2017.

(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.

(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.

Short answer

1. Discount on note payable totals$190,200.
2. Discount of$40,980 was amortized on 31 Dec 2018.
3. Discount of$45,078 was amortized on 31 Dec 2019.

Step-by-step solution

Definition of Depreciation

The non-cash expenses concerned with the fixed assets of the business entity are known as depreciation expenses. Such expenses are non-cash, but they decrease the value of the business entity's assets.

Journal entry for purchase on December 31, 2017

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2017	Computer equipment	409,800
	Discount on notes payable	190,200
	Note payable		600,000

Working note:

Calculation of present value of the note payable

$\begin{array}{rcl}\mathit{P}\mathit{r}\mathit{e}\mathit{s}\mathit{e}\mathit{n}\mathit{t}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{f}\mathit{n}\mathit{o}\mathit{t}\mathit{e}\mathit{p}\mathit{a}\mathit{y}\mathit{a}\mathit{b}\mathit{l}\mathit{e}& \mathbf{=}& \mathit{M}\mathit{a}\mathit{t}\mathit{u}\mathit{r}\mathit{i}\mathit{t}\mathit{y}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{\times }\mathit{P}\mathit{V}\mathit{I}\mathit{F}\mathbf{(}\mathbf{10}\mathbf{\%}\mathbf{,}\mathbf{4}\mathit{y}\mathit{e}\mathit{a}\mathit{r}\mathit{s}\mathbf{)}\\ & \mathbf{=}& \mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{1}}{{\left(1+0.10\right)}^{\mathbf{4}}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{6830}\\ & \mathbf{=}& \mathbf{\$}\mathbf{409}\mathbf{,}\mathbf{800}\\ & & \end{array}$

Amortization Schedule for a discount on notes payable

Date	Discount amortized @ 10% of previous year book value	Book value
31 Dec 2017		$409,800
31 Dec 2018	$40,980	$450,780
31 Dec 2019	$45,078	$495,858
31 Dec 2020	$49,586	$545,444
31 Dec 2021	$54,544	$600,000

 Step 3: Journal entry relating to adjusting entry and depreciation on 31 Dec 2018

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2018	Depreciation expenses -Computer equipment	67,960
	Accumulated depreciation		67,960
31 Dec 2018	Interest expenses	40,980
	Discount on notes payable		40,980

Journal entry relating to adjusting entry and depreciation on 31 Dec 2019

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2018	Depreciation expenses -Computer equipment	67,960
	Accumulated depreciation $\left(\frac{\$409,800-\$70,000}{5}\right)$		67,960
31 Dec 2018	Interest expenses	45,078
	Discount on notes payable		45,078