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 $800,000, three-year note that specified 5% 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Reg 2 Reg 3 Complete the table below to determine the price of the equipment. (Round final answers to the nearest whole dolla Table values are based on: Present Value Cash Flow Amount Interest Principal Price of equipment

Answer 1

Part 1-a

Table values are based on:
n =	3
i =	9.0%
Cash flow	Amount	Present value
Interest	40000	101252
Principal	800000	617744
Price of machinery		718996

Interest	40000	X	2.53129	=	101252
principal	800000	x	0.77218	=	617744
Present value (price) of the notes					718996

800000*5% = 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	718996
	Discount on notes payable (800000-718996)	81004
	Notes payable		800000
	(to record the purchase of the lathe)

Part 2

amortization schedule

	Cash Payment	Effective interest	Increase in balance	Carrying Value
				718996
1	40000	64710	24710	743706
2	40000	66934	26934	770640
3	40000	69360	29360	800000
Total	120000	201004	81004

Cash payment = 800000*5% = 40000

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	64710
	Discount on notes payable		24710
	Cash		40000
	(to record first interest payment)
2	Interest expense	66934
	Discount on notes payable		26934
	Cash		40000
	(to record second interest payment)
3	Interest expense	69360
	Discount on notes payable		29360
	Cash		40000
	(to record third interest payment)
4	Notes payable	800000
	Cash		800000
	(to payment of note at maturity)