have Amber Mining and Milling, Inc., contracted with Truax Corporation to have c

Question

have 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 $650,000, 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. (Fy of $1 pV of $1, FIA of $1. PVA of S. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) ExAD of Si) Uish sinliar trnccmbr0aion 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

Explanation / Answer

Answer 1(a) . Table Value Based on n= 3 Years i= 9% Cash Flow Amount Present Value Interest - $650,000 X 4%                26,000                                 65,814 ($150,000 X 2.53129) Principal              650,000                              501,917 ($650,000 X 0.77218) Price of Equipment                              567,731 Answer 1-b & 3. Journal Entry Date Particualrs Dr. Amt Cr. Amt Year 0 Machinery                                                   Dr.           567,731 Discount on Notes Payable                  Dr.            82,269    To Notes Payable          650,000 (Record the purchase of machine against the note) Year 1 Interest Expense                                      Dr.              51,096 To Cash            26,000 To Discount on Issue of Note                       25,096 (Record the interest Paid - Year 1) Year 2 Interest Expense                                      Dr.              53,354 To Cash            26,000 To Discount on Issue of Note                       27,354 (Record the interest Paid - Year 2) Year 3 Interest Expense                                      Dr.              55,818 To Cash            26,000 To Discount on Issue of Note                       29,818 (Record the interest Paid - Year 3) Year 3 Notes Payable                                           Dr.           650,000    To Cash          650,000 (Record the Notes paid) Answer 2. Year Cash Payment Effective Interest Increase in Balance outstanding Balance A = $650,000 X 4% B = O/s Balance X 9% C = B - A 0                                 -                                          -                          -                567,731 1                        26,000                               51,096               25,096              592,827 2                        26,000                               53,354               27,354              620,181 3                        26,000                               55,818               29,818              650,000

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