Question

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Exercise 14-17 (Algo) Note with unrealistic interest rate; borrower; amortization schedule [LO14-3] 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. (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.) eBook 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. Hint Ask Complete this question by entering your answers in the tabs below. Print Req 1A Req 1B Reg 2 Reg 2 Reg 3 Reg 3 Ferences Complete the table below to determine the price of the equipment. (Round final answers to the nearest whole dollar.) Table values are based on: Present Value Cash Flow Amount Interest Principal Price of equipment < Req 1A Req 1B >

Answer 1

Requirement 1A:

Table values are based on:
n=	3
i=	9%
Cash Flow	Amount	Present value
Interest	$          34,000	$            86,064
Principal	$        850,000	$         656,356
Price of equipment		$         742,420

Interest = $850,000 x 4% = $34,000

Present value of interest payments = $34,000 x 2.531295 present value annuity factor = $86,064

Present value of principal = $850,000 x 0.7721834 present value factor = $656,356

Requirement 1B:

Date	Account title and Explanation	Debit	Credit
Jan 1,2021	Machine	$742,420
	Discount on notes payable	$107,580
	Notes payable		$850,000
	[To record purchase of lathe]

Requirement 2:

Year	Cash payment	Effective Interest	Increase in Balance	Outstanding Balance
				$742,420
1	$34,000	$66,818	$32,818	$775,238
2	$34,000	$69,771	$35,771	$811,009
3	$34,000	$72,991	$38,991	$850,000

Cash payment = $850,000 x 4% = $34,000

Effective interest = Preceding outstanding balance x 9%

Increase in balance = Cash payment - Effective interest

Outstanding balance = Preceding balance + Increase in balance

Requirement 3:

Date	Account title and Explanation	Debit	Credit
Dec 31, Year 1	Interest expense	$66,818
	Discount on notes payable		$32,818
	Cash		$34,000
	[To record interest payment]
Dec 31, Year 2	Interest expense	$69,771
	Discount on notes payable		$35,771
	Cash		$34,000
	[To record interest payment]
Dec 31, Year 3	Interest expense	$72,991
	Discount on notes payable		$38,991
	Cash		$34,000
	[To record interest payment]
Dec 31, Year 3	Notes payable	$850,000
	Cash		$850,000
	[To record payment of the note at maturity]