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

Ques 1
tables values are based on
n	3
i	10%
cash flow	amount	present value
interest	20000	$            49,737
principal	500000	$         375,658
price of equipment		$         425,395
note :
PVAF(i=12%,t=3)=		2.486852
PVIF(i=12%,t=3)=		0.751315
Journal entry on Jan 1
Equipment	$                                      425,395
discount on notes payable	$                                         74,605
notes payable		500000
Ques 2
period	Cash payment	Effective interest(10%)	Increase in balance	outstanding balance
				$     425,395
1	20000	$            42,539	$          22,539	$     447,934
2	20000	$            44,793	$          24,793	$     472,727
3	20000	$            47,273	$          27,273	$     500,000
total	$                                         60,000	$         134,606	$          74,606
Ques 3
no.	General journal	debit	credit
1	Interest expense	$            42,539
	discoun on notes payable		$          22,539
	cash		$          20,000
2	Interest expense	$            44,793
	discoun on notes payable		$          24,793
	cash		$          20,000
3	Interest expense	$            47,273
	discoun on notes payable		$          27,273
	cash		$          20,000
4	Notes payable	$         500,000
	cash		$        500,000