On December 31, 2017, Vaughn Company acquired a computer from Plato Corporation

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-

Explanation / Answer

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

$378,133

2) to calculate depreciation expense

(Pv computer - Salvage value)

($378,133 - $75000)/5

= $ 60,626.6

Debit

Working note (W.N)

1)

$474,330.03

C)

Debit credit 31- dec-2017 computer equipment

$378,133

Discount on note payable $216,867 Note payable $595,000

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