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 $600,000, 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 12% 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 below table to prepare the company's journal entry. 1-b. Prepare the journal entry on January 1, 2018, for Truax Corporation's sale 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 for Truax. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req3 Complete the below table to prepare the company's journal entry. (Round final answers to the nearest whole dollar.) Table values are based on: Present Value Cash Flow Amount Interest Principal Price of equipment Req1A Req 1B >

Answer 1

Requirement 1a:

Table values are based on:
n=	3
i=	12%
Cash Flow	Amount	Present value
Interest	$24,000	$57,644
Principal	$600,000	$427,068
Price of equipment		$484,712

Calculations:

Interest = $600,000 x 4% = $24,000

Present value of interest payments	$57,644
[$24,000 x 2.40183 present value annuity factor (3 years, 12%)]
Present value of principal	$427,068
[$600,000 x 0.71178 present value factor (3 years, 12%)]
Price of equipment	$484,712

Requirement 1b:

Date	Account title and Explanation	Debit	Credit
Jan 1,2018	Notes receivable	$600,000
	Discount on notes payable		$115,288
	Sales revenue		$484,712
	[To record sale of lathe]

Requirement 2:

Amortization Schedule
Year	Cash received	Interest revenue	Discount amortized	Carrying value
0				$484,712
1	$24,000	$58,165	$34,165	$518,877
2	$24,000	$62,265	$38,265	$557,143
3	$24,000	$66,857	$42,857	$600,000
Total	$72,000	$187,288	$115,288

Interest revenue = Preceding carrying value x 12%

Discount amortized = Interest revenue - Cash received

Carrying value = Preceding carrying value + Discount amortized

Requirement 3:

a. Journal Entries for interest

Date	Account title and Explanation	Debit	Credit
Dec 31,2018	Cash	$24,000
	Discount	$34,165
	Interest revenue		$58,165
	[To record receipt of interest]
Dec 31,2019	Cash	$24,000
	Discount	$38,265
	Interest revenue		$62,265
	[To record receipt of interest]
Dec 31,2020	Cash	$24,000
	Discount	$42,857
	Interest revenue		$66,857
	[To record receipt of interest]

b.Journal entry for payment of note at maturity

Date	Account title and Explanation	Debit	Credit
Dec 31,2020	Notes receivable	$600,000
	Cash		$600,000
	[To record payment of notes at maturity]