Question

"AFE 588 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 8% was a reasonable rate of interest. (EY of $1. PV of $1. EVA L $1. PVA of $1. EVAD 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 Complete this question by entering your answers in the tabs below. Reg LA Reg 18 Reg 2 Complete the table below to determine the price of the equipment (Round final answers to the nearest whole dollar) Table values are based on Present Value Cash Flow Amount Interest Principal Price of equipment arch

Answer 1

1.a) n= 3 years and i = 5%

Interest = $25000 multiply by PV factor of 8% int rate** = $ 25000 * 2.5771 = $ 64,427

Interest amount = $ 25000 and Present value amount = $64,427

Principal = $ 500,000 multiply by PV factor of 8% rate** = $ 500000*0.7938 = $ 396,916

Principal amount = $ 500,000 and Present value amount = $ 396,916

Total = $ 64,427 + $ 396,916 = $ 461,343

** please refer amortization schedule attached to understand the computation of PV factor.

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1.b) Journal Entry as of January 1, 2021:

Dr. Machinery and Equipment $ 461,343

Dr. Discount on Note Payable $ 38,657

Cr. Note Payable $ 500,000

(To record purchase of lathe)

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2) Amortization schedule of note payable:

FV of note Payable Interest Rate FV of interest Market Interest Rate (r) PV Factor for note payable (1/(1+r)^n PV Factor for interest ((1-(1+r)^-(n*m))/ Number of years (n) Payment per annum (m) PV of note payable (rounded off to 0 decimal places) PV of interest (rounded off to 0 decimal places) Total PV 500000 A 5% B 25000 C=A*B 8% D 0.7938 E 2.5771 F 36 1 H 396,916.00 I=A*E 64,427.00 J=C*F 461,343.00 K=1+ Interest Expense Increase in balance Cash Payment L=K*D L-C Outstanding Balance K=Opening balance plus amortization discount 461,343.00 473,250.00 486,110.00 500,000.00 Year 1 Year 2 Year 3 25,000.00 25,000.00 25,000.00 36,907.00 37,860.00 38,890.00 11,907.00 12,860.00 13,890.00 75,000.00 113,657.00 38,657.00 |

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3) Journal entries for payment of interest and note payable on maturity:

Credit Date Dr./Cr 31-Dec-21 Dr Debit $ 36,907 $ 11,907 $ 25,000 Cr $ 37,860 31-Dec-22 Dr Tar Account Title Interest Expense Discount on note payable Cash Interest Expense Discount on note payable Cash Interest Expense Discount on note payable Cash Note Payable Cash $ 12,860 $ 25,000 31-Dec-23 Dr $ 38,890 $ $ 13,890 25,000 Cr $ 500,000 31-Dec-23 Dr | cr $ 500,000