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 $850,000, 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 9% was a reasonable rate of interest. (EV of $1. PV of $1. EVA of $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 1A Reg 1B Reg 2 Reg 3 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 Reg 10 >

Answer 1

Req. 1A		n	3
		i	9%
		Cash flow	Amount	Present value
		Interest	$34,000	$86,064
			(850,000*4%)	(34,000*2.531294666)
		Principal	$850,000	$656,356
				(850,000*0.7721834801)
		Price of equipment		$742,420
Req 1B		Date	General Journal		Debit	Credit
		jan 1 2021	Equipment - constructed Lathe(asset)		$742,420
			Note payable			$742,420
		(850,000*4%)
Req 2		Cash payment	Effective Interest	Increase in balance	Oustanding bal.
	1	$34,000	$66,818	$32,818	$775,238
			(742,420*9%)	(66,818-34,000)	(742,420+32,818)
	2	$34,000	$69,771	$35,771	$811,009
			(775,238*9%)	(69,771-34,000)	(775,238+35,771)
	3	$884,000	$72,991.00	-$811,009.00	$0
Req 3	Date	Account titles and explanations		Debit	Credit
a	31-Dec-21	Interest expense		$66,818
		Cash			$34,000
		Note payable			$32,818
		(Interest for first year recorded)
	31-Dec-22	Interest expense		$69,771
		Cash			$34,000
		Note payable			$35,771
		(Interest for second year recorded)
	31-Dec-23	Interest expense		$72,991
		Cash			$34,000
		Note payable			$38,991
		(Interest for third year recorded)
b	31-Dec-23	Note payable		$850,000
		Cash			$850,000
		(Note payable paid)