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.) 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.
Req 1A
Table values are based on: | ||
n = | 9% | |
i = | 3 | |
Cash Flow | Amount | Present Value |
Interest | $ 34,000 | $ 86,064 |
Principal | $ 850,000 | $ 656,356 |
Price of equipment | $ 742,420 |
Req 1B
Account | Debit | Credit |
Equipment | $ 742,420 | |
Discount on Notes Payable | $ 107,580 | |
Notes Payable | $ 850,000 | |
Req 2
Cash Payment | Effective Interest | Increase in Balance | Outstanding Balance | |
$ 742,420 | ||||
1 | $ 66,817.80 | $ 34,000 | $ 32,817.80 | $ 775,238 |
2 | $ 69,771.40 | $ 34,000 | $ 35,771.40 | $ 811,009 |
3 | $ 72,990.83 | $ 34,000 | $ 38,990.83 | $ 850,000 |
Total | $ 209,580.02 | $ 102,000.00 | $ 107,580.02 |
Req 3
Account | Debit | Credit | |
Year 1 | Interest Expense | $ 66,818 | |
Cash | $ 34,000 | ||
Discount on Notes Payable | $ 32,818 | ||
Year 2 | Interest Expense | $ 69,771 | |
Cash | $ 34,000 | ||
Discount on Notes Payable | $ 35,771 | ||
Year 3 | Interest Expense | $ 72,991 | |
Cash | $ 34,000 | ||
Discount on Notes Payable | $ 38,991 | ||
(b) | Notes Payable | $ 850,000 | |
Cash | $ 850,000 | ||
Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The...
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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. (EV of $1. PV of...
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. (EV of $1. PV of...
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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...