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 $500,000, 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 8% 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, 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.

Answer 1

Complete the first three rows of the table in the manner given below: 2A IBC Amount PVF@8% Present value 2 Cash flow $20.000 2.57710 $51.542 3 Principal amount $500,000 0.79383 $396.915 4 Price of machinery $448,457 5 Issue price $500,000 6 Discount on notes payable $51,543 Prepare spreadsheet showing computation of amounts in completed table, in the manner given below: Amount =500000*4% 500000 PVF@8% =ROUND((1-(1/(1+0.08) 3))*(1/0.08),5) =ROUND((1/(1+0.08)^3),5) 2 Cash flow 3 Principal amount 4 Price of machinery 5 Issue price 6 Discount on notes payable Present value =B2*C2 =B3*C3 =D2+D3 500000 =D5-D4 Prepare journal entry on January 1, 2021, in the manner given below: Credit Account Machinery Discount on Notes Payable Note Payable Debit $448,457 $51,543 $500,000

Prepare an amortization schedule for three-year note, in the manner given below: Bond Cash Interest | Discount Carrying Payment Expense Amortization Value @8% $448,457 3 11 $20,000 $35,877 $15.877 $464,334| 4 2 $20,000 $37,147 $17,147 $481,480 5 31 $20,000 $38,518) $18,518 $500,000 Prepare the spreadsheet showing calculation of amortization schedule, in the manner given below: A B D E Cash C Bond Interest Expense @8% Discount Amortization Carrying Value Payment 3 1 =500000*4%]=E2*0.08 4 2 1=500000*4%]=E3*0.08 5 3 1=500000*4% =E4*0.08 =C3-B3 =C4-B4 =C5-B5 |448457 I=E2+D3 =E3+D4 I=E4+D5

Prepare journal entry to record interest for each of the three years, in the manner given below: Credit Debit $35.876.56 Account Interest expense Discount on notes payable Cash (To record interest expense for year 1) $15,876.56 $200,000 $37,146.68 Interest expense Discount on notes payable Cash (To record interest expense for year 2) $17.146.68 $200,000 $38,518.42 Interest expense Discount on notes payable Cash (To record interest expense for year 1) $18,518.42 $200,000

Prepare journal entry to payment of notes on maturity, in the manner given below: Credit Debit $500,000 Account Notes Payable Cash (To record payment of maturity) $500,000