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 2 Reg Complete 92 determine the (Round final answers to the nearest whole dollar.) Table values are based on: Cash Flow Amount Present Value res Principal Price of equip

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)