Exercise 1417 Note with unrealistic interest rate borrower a

Exercise 14-17 Note with unrealistic interest rate; borrower; amortization schedule [L014-3] 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 $550,000, 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. (FV0f$1, P 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. Complete this question by entering your answers in the tabs below Req 1A Req 1B Req 2 Req 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: Cash Flow Interest Principal Amount Present Value Price of equipment

Solution

1

Prepare the Journal entry on january 1 2016 for Amber Minning and Millings\'s Purchase of the lathe

Working

$

Interest

($550000*4%*2.5313)

55689

Principal

($550,000*0.7721)

424655

Total

480344

Particulars

Debit

Credit

Machinery

480343.6

Discount on notes Payable

69656.4

     Notes payable

550000

2. Amortisation schedule

Cash Payment

Effective int

Increase bal.

Outstanding bal.

480344

22000

43231

21231

501575

22000

45142

23142

524716

22000

47224

25284

550000

3. Prepare a journal entry to record (a) interest for three years

Particulars

Debit

Credit

Interest expense

43231

      Discount on notes Payable

21231

      Cash

22000

Interest expense

43231

      Discount on notes Payable

21231

      Cash

22000

Interest expense

47224

      Discount on notes Payable

25284

      Cash

22000

           

(b) Payment of note at maturity

Notes Payable

550000

    cash

550000

1	Prepare the Journal entry on january 1 2016 for Amber Minning and Millings\'s Purchase of the lathe
		Working	$
	Interest	($550000*4%*2.5313)	55689
	Principal	($550,000*0.7721)	424655
	Total		480344