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 3% 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.

Answer 1

a) jornal entry for purchase of lathe

Cash flow	amount	present value
Interest	22500	54041
Principal	750000	533835
Price		587876

1) machinery a/c . Dr. 587878

Discount on notes payble a/c dr. 162124

To notes payble a/c. 750000   

2)

Year	Cash payment	bond interest expense	discount amortizatiom	carrying value
				587876
1	22500	70545	48045	635921
2	22500	76311	53811	689732
3	22500	82768	60268	750000

3) journal entry for a)interest expense b) payment of the note at maturity.

Event	journal	debit	credit
1)	interest expense alc dr.	70545
	To Discount on notes payble		48045
	To cash		22500
2)	interest expense	76311
	To discount on notes payble		53811
	To cash		22500
3)	interest expense	82768
	To discount on notes payble		60268
	To cash		22500
4)	notes payble	750000
	To cash		750000

For any query please comment and do give positive rating