On December 31, 2014, Faital Limited acquired a machine from Plato Corporation by issuing a $600,000, non-interest-bearing note that is payable in full on December 31, 2018. The company's credit rating permits it to borrow funds from its several lines of credit at 10%. The machine is expected to have a five-year life and a $70,000 residual value.
Instructions
(a) Prepare the journal entry for the purchase on December 31, 2014.
(b) Prepare any necessary adjusting entries related to depreciation of the asset (use straight-line) and amortization of the note (use the effective interest method) on December 31, 2015.
(c) Prepare any necessary adjusting entries related to depreciation of the asset and amortization of the note on December 31, 2016.
(d) Assume that on December 31, 2014, prior to purchasing the machine, Faital had total debt of $432,000 and total assets of $896,000. From the perspective of a creditor, discuss the effect of the purchase on Faital's debt-paying ability.