Question

Problem 14-8 On December 31, 2017, Buffalo Company acquired a computer from Plato Corporation by issuing a $548,000 zero-interest-bearing note, payable in full on December 31, 2021. Buffalo 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 $64,000 salvage value 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 Explanatiose Debit Credit December 31, 2017 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 O 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

Answer 1

VALUE OF COMPUTER = PRESENT VALUE OF ZERO INTEREST BEARING NOTE PAYABLE

VALUE OF ZERO INTEREST BEARING NOTE PAYABLE AFTER 4 YEARS i.e. AS ON DEC. 31, 2021 = $548000

PV OF NOTE PAYABLE = FUTURE VALUE OF NOTE PAYABLE x Present value factor for a single payment (10%, 4 periods)

= $548000 x 0.683 = $374291

VALUE OF THE COMPUTER = $ 374291

LIFE OF COMPUTER = 5 YEARS

SALVAGE VALUE = $ 64000

DEPRECIATION METHOD = SLM

DEPRECIATION PER YEAR = 374291 - 64000 / 5 = $ 62058.

CALCULATION OF AMORTISATION OF DISCOUNT

DATE	INTEREST PAYMENT (a)	EFFECTIVE INTEREST RATE (b)	INTEREST EXPENSES (c)= (e) x (b)	AMORTISATION OF DISCOUNT (d) = (a) - (c)	PRESENT VALUE OF NOTE PAYABLE (e) = (e) OF PREVIOUS YEAR + (d)
DEC.31, 2017					$ 374291
DEC.31, 2018	$0	10%	$37429	$37429	$411720
DEC. 31, 2019	$0	10%	$41172	$41172	$452892
DEC.31, 2020	$0	10%	$45289	$45289	$498181
DEC.31, 2021	$0	10%	$49819	$49819	$548000

JOURNAL ENTRIES

DATE	PARTICULARS	AMT	AMT
		IN $	IN $
DEC.31, 2017	COMPUTER A/C DR.	374291
	TO ZERO INTEREST RATE NOTE PAYABLE		374291
DEC.31, 2018	DEPRECIATION A/C DR.	62058
	TO COMPUTER		62058
	AMORTISATION OF DISCOUNT A/C DR.	37429
	TO NOTE PAYABLE		37429
DEC.31, 2019	DEPRECIATION A/C DR.	62058
	TO COMPUTER		62058
	AMORTISATION OF DISCOUNT A/C DR.	41172
	TO NOTE PAYABLE		41172