Question

Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The machine was co
Req 1A Reg 1B Req 2 Req3 Prepare the journal entry on January 1, 2021, for Amber Mining and Millings purchase of the lathe t
compieCU CITU Trauy TUI USE UIT January 1, ZULI. MIVEi palu TUI LE TALE Uy issuu interest, payable annually on December 31 of
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Answer #1

1-a

Table values are based on:

n =

3

i =

9.0%

Cash flow

Amount

Present value

Interest

34000

86064

Principal

850000

656353

Price of machinery

$742417

Interest

34000

X

2.53129

=

86064

principal

850000

x

0.77218

=

656353

Present value (price) of the notes

742417

850000*4% = 40000

Present value of an ordinary annuity of $1: n= 3, i= 9% =2.53129

Present value of $1: n= 3, i= 9% =0.77218

Part 1-b

Date

General Journal

Debit

Credit

January 1, 2021

Machinery

742417

Discount on notes payable (850000-742417)

107583

Notes payable

850000

(to record the purchase of the lathe)

Part 2

Amortization schedule

Cash Payment

Effective interest

Increase in balance

Carrying Value

742417

1

34000

66818

32818

775235

2

34000

69771

35771

811006

3

34000

72994

38994

850000

Total

102000

209583

107583

Cash payment = 850000*4% = 34000

Effective interest = previous carrying value *9%

Increase in balance = effective interest – cash payment

Carrying value = previous carrying value - Increase in balance

Part 3

Event

General Journal

Debit

Credit

1

Interest expense

66818

Discount on notes payable

32818

Cash

34000

(to record first interest payment)

2

Interest expense

69771

Discount on notes payable

35771

Cash

34000

(to record second interest payment)

3

Interest expense

72994

Discount on notes payable

38994

Cash

34000

(to record third interest payment)

4

Notes payable

850000

Cash

850000

(to payment of note at maturity)

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