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 $340,000 note due in three years. Interest, specified at 4%, 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 8% 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.

Record for the Holly Springs’ purchase on January 1, 2018.

2.Prepare an amortization schedule for the three-year term of the note.

Year	Cash Payments	Effective Interest	Increase in Balance	Outstanding Balance
1
2
3
	0	0	0

3. Prepare the journal entries to record (a) interest for each of the three years and (b) payment of the note at maturity.

Record the interest for first year.

Record the interest for second year.

Record the interest for third year.

Record the entry for payment of the note at maturity

Answer 1

	Cash Flow	Amount	Present value
	Interest	40800	35048.56
	Principal	340000	269902.9619
	Price of machinery		304951.5
Date	Account title and Explanation	Debit	Credit
Jan, 1 2018	Machinery	304952
	Discount on notes Payable	35048
	Cash		340000
	(To record purchase of machine)
Year	Cash Payments	Effective Interest	Increase in Balance	Outstanding Balance
				304952
1	13600	24396	10796	315748
2	13600	25260	11660	327408
3	13600	26192	12592	340000
	40800	75848	35048
Date	Account title and Explanation	Debit	Credit
2018	Interest expense	24396
	Discount on Note		10796
	Cash		13600
	(To record interest expense)
2019	Interest expense	25260
	Discount on Note		11660
	Cash		13600
	(To record interest expense)
2020	Interest expense	26192
	Discount on Note		12592
	Cash		13600
	(To record interest expense)
	Note Payable	340000
	Cash		340000
	(To record payment of note)