Question

Amber Mining and Milling Inc., contracted with Traux Corporation to have constructed a custom-made lathe. the machine was completed and ready for use on January 1st 2016. Amber paid for the lathe by issuing a $600,000 3 year note that specified 4% interest payable annually on December 31st of each year. the cash market price of the lathe was unknown. it was determined by comparison with similar transactions they 12% was a reasonable rate of interest

1. prepare the journal entry on January 1st 2016 for Amber Mining and Milling purchase of the lathe.
2. prepare and amortization schedule for the three-year term of the note.
3. prepare the journal entries to record interest for each of the three years and payment of the note at maturity.

Answer 1

1)

		Debit	Credit
01-01-2016	Machinery	$ 484,712.00
	Discount on notes payable	$ 115,288.00
	Notes payable		$ 600,000.00

Working note-

Calculation of Machinery cost

=

Interest	(24000*2.40183)	$    57,644.00
Principal	(600,000*0.71178)	$ 427,068.00
		$ 484,712.00

2)

Cash Payment	Effective Interest	Increase Balance	Outstanding Balance
			$                  484,712.00
$      24,000.00	$                 58,165.00	$               34,165.00	$                  518,877.00
$      24,000.00	$                 62,265.00	$               38,265.00	$                  557,143.00
$      24,000.00	$                 66,857.00	$               42,857.00	$                  600,000.00

3)

Interest Expense	$ 58,165.00
Discount on notes payable		$ 34,165.00
Cash		$ 24,000.00
Interest Expense	$ 62,265.00
Discount on notes payable		$ 38,265.00
Cash		$ 24,000.00
Interest Expense	$ 66,858.00
Discount on notes payable		$ 42,858.00
Cash		$ 24,000.00