P14-8 (Entries for Zero-Interest-Bearing Note) On December 31, 2010, Faital Comp
ID: 2379073 • Letter: P
Question
P14-8 (Entries for Zero-Interest-Bearing Note) On December 31, 2010, Faital Company acquired a computer from Plato Corporation by issuing a $600,000 zero-interest-bearing note, payable in full on December 31, 2014. 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.
(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2012.
Explanation / Answer
Answer :- Present value of computer = 600000 / (1 + 0.10)4
= 600000 / (1.10)4
= 600000 / 1.4641
= $ 409808 (approx).
Journal entries
Depreciation expense A/c Dr.
To Accumulated Depreciation (Computer) A/c
67961.60
67961.60
Note 1 :- Depreciation expense = (409808 - 70000) / 5
= 339808 / 5
= $ 67961.60 (approx).
Journal entries
Interest expense A/c Dr.
To Discount on notes payable A/c
45078.88
45078.88
Note :- Carrying value of computer as on Dec. 31, 2011 = 409808 + 10 % of 409808.
= 409808 + 40980.80
= $ 450788.80
Amortization of interest expense = 450788.80 * 10 %
= $ 45078.88
Date Particulars Debit Credit Dec. 31, 2012Depreciation expense A/c Dr.
To Accumulated Depreciation (Computer) A/c
67961.60
67961.60
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