Question

Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2021. Amber paid for the lathe by issuing a $600,000, three-year note that specified 4% interest, 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 that 12% was a reasonable rate of interest.

Note with unrealistic interest rate; lender; amortization schedule

● LO14–3

Refer to the situation described in E 14–17.

Required:

1. Prepare the journal entry on January 1, 2021, for Truax Corporation’s sale of the lathe. Assume Truax spent $400,000 to construct 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 for Truax.

Answer 1

Sollution 1
journal entry
Date	Account title and Explanation	Debit	Credit
Jan 1,2021	Notes Receivable	$600,000.00
	Sales Revenue		$484712.00
	Discount on notes receivable		$115288.00
	[To record Sale of machine]
	Cost of Goods Sold	$400,000.00
	Inventory		$400,000.00
	(Cost of goods sold

Working
Computation of price of equipments
Table values are based on:
n=	3 years
i=	12%
Cash flow	Table Value	Amount	Present Value
face value	0.711780248	$600,000.00	$427,068
Interest (Annuity)	2.401831268	$24,000.00	$57,644
Price of the equipment			$484,712
Interest payment	= $600,000 x 4%	$24,000

Sollution 2
Date	Cash Payment	Effective Interest	Discount amortized	Carrying value
	(a)	b=Preceding carrying value x 12%	c=(b-a)	d=Preceding carrying value + Discount amortized
1/1/2021				$484,712
12/31/2021	$24,000	$58,165	$34,165	$518,878
12/31/2022	$24,000	$62,265	$38,265	$557,143
12/31/2023	$24,000	$66,857	$42,857	$600,000
Total	$72,000	$187,288	$115,288
Cash payment = $600,000 x 4% = $24,000

Sollution 3
journal entry of Truax
(a)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2021	Cash	$24,000.00
		Discount on Notes receivable	$34,165.00
		Interest Revenue		$58,165.00
		[To record interest payment]
	Dec 31,2022	Cash	$24,000.00
		Discount on Notes receivable	$38,265.00
		Interest Revenue		$62,265.00
		[To record interest payment]
	Dec 31,2023	Cash	$24,000.00
		Discount on Notes receivable	$42,857.00
		Interest Revenue		$66,857.00
		[To record interest payment]
(b)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2023	Cash	$600,000.00
		Notes Receivable		$600,000.00
		[To record payment of note at maturity]