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, 2016. Amber paid for the lathe by issuing a $720,000, 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 20% 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 below table to prepare the company's journal entry.

Table values are based on: Present Value 20.0% Cash Flow Amount Interest $ 28,800 Principal $ 720,000 Price of machinery

1-b.	Prepare the journal entry on January 1, 2016, for Truax Corporation’s sale of the lathe. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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 for Truax. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Amount	PV Factor	Present Value
7,20,000	0.5787	4,16,664
28,800	2.1064	60,664
Price of Equipment		4,77,328

Account	Debit	Credit
Equipment	4,77,328
Discount on Notes Payable	2,42,672
Notes Payable		7,20,000

Period	(a) Interest Expense (d *20%)	(b) Interest Payable (720,000 * 4%)	(c) Discount Amortization (a - b)	(d) Carrying Value (d + c)
				4,77,328
1	95,466	28,800	66,666	5,43,994
2	1,08,799	28,800	79,999	6,23,993
3	1,24,807	28,800	96,007	7,20,000

Account	Debit	Credit
(a)
Year 1
Interest Expense	95,466
Cash		28,800
Discount on Notes Payable		66,666
Year 2
Interest Expense	1,08,799
Cash		28,800
Discount on Notes Payable		79,999
Year 3
Interest Expense	1,24,807
Cash		28,800
Discount on Notes Payable		96,007
(b)
Notes Payable	7,20,000
Cash		7,20,000