Question

On December 31, 2020, Flounder Company acquired a computer from Plato Corporation by issuing a $573,000 zero- interest-bearing note, payable in full on December 31, 2024. Flounder 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. ✓ Your answer is correct. Prepare the journal entry for the purchase on December 31, 2020. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation December Equipment 31, 2020 391,367 Discount on Notes Payable 181,633 Notes Payable 573,000

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
December 31,2020	Equipment*	$391,367
	Discount on notes payable	$181,633
	Notes payable		$573,000
	[To record acquisition of equipment in exchange of zero-interest notes]

*Equipment = $573,000 x 0.68301345 present value factor (10%, 4 years) =$391,367

Requirement 2:

Date	Account title and Explanation	Debit	Credit
December 31,2021	Depreciation expense	$64,273
	Accumulated depreciation-equipment		$64,273
	[To record the depreciation]
December 31,2021	Interest expense	$39,137
	Discount on notes payable		$39,137
	[To amortize the discount]

Calculations:

i.Depreciation expense = (cost - salvage value) ÷ useful life

=(391,367-70,000)/5 years

=321,367/5

=$64,273

ii.Interest expense = Carrying amount x Interest rate

= $391,367 x 10%

=$39,137.

Requirement 3:

Schedule of Note Discount Amortization
Date	Debit, Interest Expense Credit, Discount on Notes payable	Carrying Amount of Notes
12/31/20		$391,367
12/31/21	$39,137	$430,504
12/31/22	$43,050	$473,554
12/31/23	$47,355	$520,909
12/31/24	$52,091	$573,000

Interest expense = Preceding carrying amount x 10%

Carrying amount = preceding carrying amount + Interest expense