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, 2018. Amber paid for the lathe by issuing a $750,000, 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 9% 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, 2018, 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

Required 1-a

Cash flow	amount	present value
Interest	30000 (750000*4%)	75939 Pvifa@9%,3yrs (30000*2.53129)
Principal	750000	579135 Pvif@9%,3yrs (750000*0.77218
Price of machinery		655074

Required 1-b

Event	general journal	debit	credit
1	machinery	655074
	Discount on notes payable (750000-655074)	94926
	Notes Payable		750000

Required 2

	Cash payment	bond interest expense	discount Amortization	carrying Value
				655074
1	30000	58957 (655074*9%)	28957	684031 (655704+28957)
2	30000	61563 (684031*9%)	31563	715594
3 Total	30000 90000	64406 184927	34406 94926	750000 -

Required 3

Event	general journal	debit	credit
A 1	interest expense	58957
	Discount on notes payable		28957
	Cash		30000
2	interest expense	61563
	Discount on notes payable		31563
	Cash		30000
3	interest expense	64406
	Discount on notes payable		34406
	Cash		30000
B1	notes payable	750000
	Cash		750000