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On December 31, 2017, Vaughn Company acquired a computer from Plato Corporation by issuing a $595,000...

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Accounting

On December 31, 2017, Vaughn Company acquired a computer fromPlato Corporation by issuing a $595,000 zero-interest-bearing note,payable in full on December 31, 2021. Vaughn Company’s creditrating permits it to borrow funds from its several lines of creditat 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 todepreciation (use straight-line) and amortization (useeffective-interest method) on December 31, 2018 (To record thedepreciation.) (To amortize the discount.) ( Schedule of notediscount amortization)

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

Answer & Explanation Solved by verified expert
3.9 Ratings (497 Votes)

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

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