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, 2016. Amber paid for the lathe by issuing a $700,000, three-year note that specified 6% 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 10% was a reasonable rate of interest. (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.)

Required:

1-a.	Complete the table below to determine the price of the equipment.

          

1-b.	Prepare the journal entry on January 1, 2016, for Amber Mining and Milling’s purchase of the lathe. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

         

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

          

Answer 1

	value of notes payable	700000
	interest rate	6%
	Payment period	3 years
	annual interest	42000
	Year	cash flow	present value at 10% =1/(1+r)^n	cashflow*present value
	1	42000	0.909091	38181.82
	2	42000	0.826446	34710.74
	3	42000	0.751315	31555.22
		700000	0.751315	525920.4
		Purchase Price of Lathe Machine	sum of the present value of cash flows	630368.1
	1- journal entry	Lathe machine debit	700000
		credit notes payable		700000
	2-	Amortization schedule
		1	Payment of interest	42000
		2	Payment of interest	42000
		3	Payment of interest	42000
		3	Payment of principle	700000
	Journal entry
		Year 1	Interest excpense debit	42000
			credit cash		42000
		Year 2	Interest excpense debit	42000
			credit cash		42000
		Year 3	Interest excpense debit	42000
			credit cash		42000
		Year 3	notes payable debit	700000
			credit cash		700000