Amber Mining and Milling Inc contracted with Truax Corporati

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 $800,000, 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 9% 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.

Solution

Ans 1 Table value n 3 i 9% Cash flows Amt Present value Interest (800000*5%) $40,000 $101,252 Principal $800,000 $617,744 Price of machinery $718,996 working Cash flows Amt PV factor Present value Interest (800000*5%) $40,000 2.53129 $101,252 Principal $800,000 0.77218 $617,744 Price of machinery $718,996 Ans 1b Dr Cr machinery $718,996 Discount on Notes payable $81,004 Notes payable $800,000 ans 2 Year cash payment A Interest expence B=C*9% Discount amortozed A-B Carrying V alue 0 $718,996 1 $40,000 $64,710 $24,710 $743,705 2 $40,000 $66,933 $26,933 $770,639 3 $40,000 $69,361 $29,361 $800,000 (there can be difference due to rounding off) ans 3 Event Accounst Title Dr Cr 1 Interest expenses $64,710 Discount on Notes payable $24,710 Cash $40,000 2 Interest expenses $66,933 Discount on Notes payable $26,933 Cash $40,000 3 Interest expenses $69,361 Discount on Notes payable $29,361 Cash $40,000 4 Notes payable 800000 Cash 800000 If any doubt please comment