Question

Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2018. Holly Springs paid for the lathe by issuing a $220,000 note due in three years. Interest, specified at 2%, was payable annually on December 31 of each year. The cash market price of the lathe was unknown. It was determined by comparison with similar transactions for which 6% was a reasonable rate of interest. Holly Springs uses the effective interest method of amortization. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate and final answers to the nearest whole dollar.) Required: 1. Prepare the journal entry on January 1, 2018, for Holly Springs’ purchase of the lathe. 2. Prepare an amortization schedule for the three-year term of the note. 3. Prepare the journal entries to record (a) interest for each of the three years and (b) payment of the note at maturity.

Answer 1

Solution 1:

Computation of Cash market price of Lathe
Table values are based on:
n=	3
i=	6%
Cash flow	Table Value	Amount	Present Value
Principal	0.839619	$220,000.00	$184,716
Interest	2.673012	$4,400.00	$11,761
Price of Lathe			$196,477

Journal Entries - Holly Springs Inc.
Date	Particulars	Debit	Credit
1-Jan-18	Equipment Dr	$196,477.00
	To Note payable		$196,477.00
	(To record purchase of lathe by issuing note)

Solution 2:

Amortization schedule of note
Period	Cash payment	Effective interest	Increase in balance	Outstanding balance
Opening				$196,477
1	$4,400	$11,789	$7,389	$203,866
2	$4,400	$12,232	$7,832	$211,698
3	$4,400	$12,702	$8,302	$220,000

Solution 3:

Journal Entries - Holly Springs Inc.
Event	Particulars	Debit	Credit
a1	Interest expense Dr	$11,789.00
	To Cash		$4,400.00
	To Note payable		$7,389.00
	(To record interest payment and discount amortization for year 1)
a2	Interest expense Dr	$12,232.00
	To Cash		$4,400.00
	To Note payable		$7,832.00
	(To record interest payment and discount amortization for year 2)
a3	Interest expense Dr	$12,702.00
	To Cash		$4,400.00
	To Note payable		$8,302.00
	(To record interest payment and discount amortization for year 3)
b	Note payable Dr	$220,000.00
	To Cash		$220,000.00
	(To record note payment at maturity)