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 $500,000, 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 10% 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

Part 1-a

Table values are based on:
n =	3
i =	10.0%
Cash flow	Amount	Present value
Interest	20000	49737
Principal	500000	375655
Price of machinery		425392

Interest	20000	X	2.48685	=	49737
principal	500000	x	0.75131	=	375655
Present value (price) of the notes					425392

500000*4% = 20000

Present value of an ordinary annuity of $1: n= 3, i= 10% =2.48685

Present value of $1: n= 3, i= 10% =0.75131

Part 1-b

Event	General Journal	Debit	Credit
1	Machinery	425392
	Discount on notes payable (500000-425392)	74608
	Notes payable		500000
	(to record the purchase of the lathe)

Part 2

amortization schedule

	Cash Payment	Bond Interest Expense	Discount Amortization (bond interest expense-cash payment)	Carrying Value
				425392
1	20000	42539 (425392*10%)	22539	447391 (425392+22539)
2	20000	44739 (447391)	24739	472130 (447391+24739)
3	20000	47870 (20000+27870)	27870 (500000-472130)	500000

Part 3

Event	General Journal	Debit	Credit
1	Interest expense	42539
	Discount on notes payable		22539
	Cash		20000
	(to record first interest payment)
2	Interest expense	44739
	Discount on notes payable		24739
	Cash		20000
	(to record second interest payment)
3	Interest expense	47870
	Discount on notes payable		27870
	Cash		20000
	(to record third interest payment)
4	Notes payable	500000
	Cash		500000
	(to payment of note at maturity)