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 $900,000, 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 8% 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, 2021, 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

	n=3 years
	I =8%
	Payment (900000*5%)	$45,000
1.a
		Amount	PVF at 10%	Present value
	Cash Flow	$                                                               45,000	2.57710	$       115,969
	Principal Amount	$                                                             900,000	0.79383	$       714,449
	Price of Machinery			$       830,418
1 b	Date	Account Titles and Explanation	Debit	Credit
	January 1, 2021	Machinery	$                       830,418
		Dicount on Notes Payable	$                         69,582
		To Notes Payable		$       900,000
2	Amortization schedule
	Cash Payment	Bond Interest expense 8%	Discount Amortisation	carrying value
				$       830,418
1	$                         45,000	$                                                               66,433	$                         21,433	$       851,852
2	$                         45,000	$                                                               68,148	$                         23,148	$       875,000
3	$                         45,000	$                                                               70,000	$                         25,000	$       900,000
	$                       135,000	$                                                             204,582	$                         69,582
3	Year	Account Titles and Explanation	Debit	Credit
	1	Interest Expense	$                         66,433
		Discount on Notes payable		$         21,433
		To cash A/c		$         45,000
		(Being Interst paid has been Recorded)
	2	Interest Expense	$                         68,148
		Discount on Notes payable		$         23,148
		To cash A/c		$         45,000
		(Being Interst paid has been Recorded)
	3	Interest Expense	$                         70,000
		Discount on Notes payable		$         25,000
		To cash A/c		$         45,000
		(Being Interst paid has been Recorded)
	3	Notes payable	$                       900,000
		To cash		$       900,000
		(Being cash paid for Note payable account)