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, 2021. Amber paid for the lathe by issuing a $500,000, 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 11% 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-b. Prepare the journal entry on January 1, 2021, for Truax Corporation’s sale of the lathe. Assume Truax spent $300,000 to construct 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 for Truax.

Prepare an amortization schedule for the three-year term of the note. (Round intermediate calculations and final answers to the nearest whole dollar.)

	Cash Payment Effective Interest Increase in Balance Outstanding Balance 1 2 3 Total

Answer 1

Present value Of Note =[PVA11%,3*Interest ]+ [PVF11%,3*Face value of note]

              = [2.44371* 25000] + [.73119*500000]

              = 61092.75+ 365595

              = 426,687.75 (rounded to 426688)

**Interest = 500000*5 %= 25000

Find present value annuity factor and present value factor from their table respectively at 11%

1)In books of Truax Corporation’s

Date	Account title	Debit	credit
1Jan 2021	Note receivable	426688
	Sales revenue		426688
	cost of goods sold	300000
	Inventory		300000

2)

	Cash Payment	Effective Interest	Increase in Balance	Outstanding Balance
1	500000*5%=25000	426688*11%=46936	46936-25000= 21936	426688+21936= 448624
2	25000	448624*11%= 49349	49349-25000= 24349	448624+24349= 472973
3	25000	472973*11%= 52027	52027-25000= 27027	472973+27027= 500000

3)

Date	Account title	Debit	credit
a)31Dec 2021	cash	25000
	Note receivable	21936
	Interest revenue		46936
31Dec 2022	cash	25000
	Note receivable	24349
	Interest revenue		49349
31Dec 2023	cash	25000
	Note receivable	27027
	Interest revenue		52027
31Dec 2023	cash	500000
	Note receivable		500000