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 $800,000, three-year note that specified 5% 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

	Ans 1
	Table value
	n	3
	i	9%
	Cash flows	Amt	Present value
	Interest (800000*5%)	$40,000	$101,252
	Principal	$800,000	$617,744
	Price of machinery		$718,996
	working
	Cash flows	Amt	PV factor	Present value
	Interest (800000*5%)	$40,000	2.53129	$101,252
	Principal	$800,000	0.77218	$617,744
	Price of machinery			$718,996
	Ans 1b	Dr	Cr
	machinery	$718,996
	Discount on Notes payable	$81,004
	Notes payable		$800,000
	ans 2
Year	cash payment A	Interest expence B=C*9%	Discount amortozed A-B	Carrying V alue
0				$718,996
1	$40,000	$64,710	$24,710	$743,705
2	$40,000	$66,933	$26,933	$770,639
3	$40,000	$69,361	$29,361	$800,000
(there can be difference due to rounding off)
ans 3
Event	Accounst Title	Dr	Cr
1	Interest expenses	$64,710
	Discount on Notes payable		$24,710
	Cash		$40,000
2	Interest expenses	$66,933
	Discount on Notes payable		$26,933
	Cash		$40,000
3	Interest expenses	$69,361
	Discount on Notes payable		$29,361
	Cash		$40,000
4	Notes payable	800000
	Cash		800000
If any doubt please comment