Question

On December 31, 2017, Martinez Company acquired a computer from Plato Corporation by issuing a $641,000 zero-interest-bearing note, payable in full on December 31, 2021. Martinez 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 $76,000 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 O 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 Explanation Debit Credit December 31, 2017

Answer 1

A	B	C	D	E	F	G	H
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3		Cash received from the zero interest bearing note will be the present value of the face value.
4		The difference between the face value and the cash is recorded as discount on notes payable.
5		The discount on notes payable is amortized as an interest expense periodically.
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7		Present Value of the note can be calculated as follows:
8		Face Value	$641,000
9		Interest rate	12%
10		Term	4	Years	(31 Dec 2017 to 31 Dec 2021)
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12		Present Value of the Note	=$641,000 / ((1+12%)^4)
13			$407,367.09	=D8/((1+D9)^D10)
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15		Thus the journal entry of the purchase will be as follows:
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17		Date	Account	Debit	Credit
18		31 Dec, 2017	Computer	$407,367.09
19			Discount on notes payable	$233,632.91
20			Notes Payable		$641,000
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