Question

Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2021. Holly Springs paid for the lathe by issuing a $230,000 note due in three years. Interest, specified at 3%, was 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 for which 7% was a reasonable rate of interest. Holly Springs uses the effective interest method of amortization. (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. Prepare the journal entry on January 1, 2021, for Holly Springs’ 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

In the Present question :-
Amount of Note	$230,000.00
Coupon rate	3.00%
Years	3
Reasonable Rate	7.00%
Yearly Interest	$6,900.00	(230000*3%)
Payment and Discounting Chart is as follows:-
1	0.9346	$6,900.00	$6,448.74
2	0.8734	$6,900.00	$6,026.46
3	0.8163	$236,900.00	$193,381.47
		TOTAL	$205,856.67
1.)
Prepare the journal entry on January 1, 2021, for Holly Springs' purchase of the Lathe
	Description		Amount(Dr.)	Amount(Cr.)
	Lathe		$205,856.67
	Discount on Note Payable		$24,143.33
	3 % Note Payable			$230,000.00
	(Lathe Purchased by 3 % Note)
2.)
Ammortization Schedule
A	B	C	D	E	F	G
	Interest	Interest	Ammortizing	Debit bal.	Credit Bal.	Book Value
	Payment	Expense	Note Discount	in the account	in the account	of Note
	3% * Face	Mkt 7 % * G	C minus B	Note Discount	Notes Payable	F Minus E
01/01/2021				$24,143.33		$205,856.67
31/12/2021	$6,900.00	$14,409.97	$7,509.97	$16,633.36	$230,000.00	$213,366.64
31/12/2022	$6,900.00	$14,935.66	$8,035.66	$8,597.70	$230,000.00	$221,402.30
31/12/2023	$6,900.00	$15,498.16	$8,597.70	$0.00	$230,000.00	$0.00
3.)
Journal Entries
Date	Description		Amount(Dr.)	Amount(Cr.)
31/12/2021	Interest Expense		$14,409.97
	Discount on Notes Payable			$7,509.97
	Cash			$6,900.00
	(Interest Paid for the Year ended )
31/12/2022	Interest Expense		$14,935.66
	Discount on Notes Payable			$8,035.66
	Cash			$6,900.00
	(Interest Paid for the Year ended )
31/12/2023	Interest Expense		$15,498.16
	Discount on Notes Payable			$8,597.70
	Cash			$6,900.00
	(Interest Paid for the Year ended )
31/12/2023	3 % Note Payable		$230,000.00
	Cash			$230,000.00
	(Note Paid off at the end of 3 rd Year)

THANKS & REGARDS

HOPING FOR A POSITIVE RESPONSE