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 $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, 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

Solution

Amber Mining and Milling Inc

1. Determine -

1-a. price of equipment:

Price of equipment = present value of note + present value of interests

Annual interest payment = 900,000 x5% = $45,000

PV factor Present amount at 8% Value $900,000 0.7938 $714,420 $45,000 2.577 $115,965 Price of equipment $830,385

1-b. Journal entry Account Titles and Explanation Ref. No. Date Debit Credit Jan 1, 2018 Equipment $830,385 Discount on Notes Payable $69,615 Notes Payable $900,000 (To record purchase of equipment by issue of notes payable)

2. Amortization schedule: Period Interest Interest Discount Carrying Payable Expense Amortization Value $830,385 $45,000 $66,431 $21,431 $851,816 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 $45,000 $68,145 $23,145 $874,961 $45,000 $69,997 $24,997 $899,958 The difference of $42 results from +/- in calculation

3. Journal entries: WW Date Dec 31, 2018 Dec 31, 2019 Account Titles and Explanation Ref. No. Debit Credit Interest Expense $66,431 Discount on Notes Payable $21,431 Cash $45,000 (To record first interest payment) Interest Expense $68,145 Discount on Notes Payable $23,145 Cash $45,000 (To record second interest payment) Interest Expense $69,997 Discount on Notes Payable $24,997 Cash $45,000 (To record third interest payment) Notes Payable $900,000 Cash $900,000 (To record payment on notes payable) Dec 31, 2020 Dec 31, 2020