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 $750,000, 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. (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

Requirement 1a:

Interest payment = $750,000 x 4% = $30,000

Present value of interest payments	$75,939
[$30,000 x 2.53129 present value annuity factor (9%, 3 years)]
Present value of Face value	$579,135
[$750,000 x 0.77218 present value factor (9%, 3 years)]
Price of the equipment	$655,074

Requirement 1b:

Date	Account title and Explanation	Debit	Credit
Jan 1,2021	Equipment	$655,074
	Discount on bonds payable	$94,926
	Bonds payable		$750,000
	[To record issuance of bonds for equipment]

Requirement 2:

Date	Cash Payment	Effective Interest	Discount amortized	Carrying value
1/1/21				$655,074
12/31/21	$30,000	$58,957	$28,957	$684,031
12/31/22	$30,000	$61,563	$31,563	$715,593
12/31/23	$30,000	$64,403	$34,407*	$750,000
Total	$90,000	$184,923	$94,926

*rounded by adding 4 for calculations

Cash payment = $750,000 x 4% = $30,000

Effective interest = Preceding carrying value x 9%

Discount amortized = Effective interest - Cash payment

Carrying value = Preceding carrying value + Discount amortized

Requirement 3:

(a)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2021	Interest expense	$58,957
		Discount on bonds payable		$28,957
		Cash		$30,000
		[To record interest payment]
	Dec 31,2022	Interest expense	$61,563
		Discount on bonds payable		$31,563
		Cash		$30,000
		[To record interest payment]
	Dec 31,2023	Interest expense	$64,403
		Discount on bonds payable		$34,407
		Cash		$3,000
		[To record interest payment]
(b)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2023	Notes payable	$750,000
		Cash		$750,000
		[To record payment of note at maturity]