Question

4.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.

Required:

1. Prepare the journal entry on January 1, 2021, for Amber Mining and Milling’s 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

Working Note :- Computation of Price of Machinery
PV of Interest of Note Payable (600000*4%*2.40183)	$57,644
PV of Face Value of Note Payable (600000*0.71178)	$427,068
Price of Machinery	$484,712

Part-1 Journal Entry- Amber Mining nd Milling Inc.
Date	Account Tittle	Debit	Credit
1-Jan	Machinery ( As per Working Note)	$484,712.00
	Discount on Note Payable	$115,288.00
	Note Payable		$600,000.00

Part-2: Amortization Schedule
Year	Cash Payment	Effective interest	Increase in balance	Carrying Value
				$484,712
1	$24,000	$58,165	$34,165	$518,877
2	$24,000	$62,265	$38,265	$557,143
3	$24,000	$66,857	$42,857	$600,000
Total	$72,000	$187,288	$115,288

Part-3 Journal Entry- Amber Mining nd Milling Inc.
Date	Account Tittle	Debit	Credit
31-Dec-21	Interest Expense	$58,615.00
	Discount on Note Payable		$34,615.00
	Cash		$24,000.00
31-Dec-21	Interest Expense	$62,265.00
	Discount on Note Payable		$38,265.00
	Cash		$24,000.00
31-Dec-21	Interest Expense	$66,857.00
	Discount on Note Payable		$42,857.00
	Cash		$24,000.00
31-Dec-21	Note Payable	$600,000.00
	Cash		$600,000.00