Vaughn Inc. has decided to purchase equipment from Central Michi

Vaughn Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Vaughn issues an $500,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 8%. The company will pay off the note in five $100,000 installments due at the end of each year over the life of the note.


Instructions

(a) Prepare the journal entry (entries) at the date of purchase. (Round to nearest dollar in all computations.)

(b) Prepare the journal entry (entries) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.

(c) Prepare the journal entry (entries) at the end of the second year to record the payment and interest.

(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)


Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...

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