Final answer:
The student's question relates to the accounting of a non-interest-bearing note exchanged for machinery. The machinery's fair value is recorded as an asset and depreciated over 10 years. The discount on the note is amortized over its 5-year life as interest expense.
Step-by-step explanation:
The student is dealing with a business finance question that involves accounting for a long-term non-interest-bearing note in exchange for machinery. At the time of acquisition, the machinery is recorded at its fair value, which is lower than the face value of the note due to the absence of interest. Since the note has no interest, the interest expense is effectively built into the note's face value and is amortized over the life of the note. The machinery's fair value is reported as a fixed asset on the balance sheet and is depreciated over its useful life using straight-line depreciation.
To compute annual depreciation, the cost of the machinery ($11,348.54) is divided by its estimated useful life (10 years), resulting in an annual depreciation expense of $1,134.854, which is recognized each fiscal year until the machinery is fully depreciated. The note's discount, the difference between the face value ($20,000) and the fair value of the machinery, is amortized as interest expense over the life of the note.