Requirement 1a:
Table values are based on: | ||
n= | 3 | |
i= | 12% | |
Cash Flow | Amount | Present value |
Interest | $24,000 | $57,644 |
Principal | $600,000 | $427,068 |
Price of equipment | $484,712 |
Calculations:
Interest = $600,000 x 4% = $24,000
Present value of interest payments | $57,644 |
[$24,000 x 2.40183 present value annuity factor (3 years, 12%)] | |
Present value of principal | $427,068 |
[$600,000 x 0.71178 present value factor (3 years, 12%)] | |
Price of equipment | $484,712 |
Requirement 1b:
Date | Account title and Explanation | Debit | Credit |
Jan 1,2018 | Notes receivable | $600,000 | |
Discount on notes payable | $115,288 | ||
Sales revenue | $484,712 | ||
[To record sale of lathe] |
Requirement 2:
Amortization Schedule | ||||
Year | Cash received | Interest revenue | Discount amortized | Carrying value |
0 | $484,712 | |||
1 | $24,000 | $58,165 | $34,165 | $518,877 |
2 | $24,000 | $62,265 | $38,265 | $557,143 |
3 | $24,000 | $66,857 | $42,857 | $600,000 |
Total | $72,000 | $187,288 | $115,288 |
Interest revenue = Preceding carrying value x 12%
Discount amortized = Interest revenue - Cash received
Carrying value = Preceding carrying value + Discount amortized
Requirement 3:
a. Journal Entries for interest
Date | Account title and Explanation | Debit | Credit |
Dec 31,2018 | Cash | $24,000 | |
Discount | $34,165 | ||
Interest revenue | $58,165 | ||
[To record receipt of interest] | |||
Dec 31,2019 | Cash | $24,000 | |
Discount | $38,265 | ||
Interest revenue | $62,265 | ||
[To record receipt of interest] | |||
Dec 31,2020 | Cash | $24,000 | |
Discount | $42,857 | ||
Interest revenue | $66,857 | ||
[To record receipt of interest] |
b.Journal entry for payment of note at maturity
Date | Account title and Explanation | Debit | Credit |
Dec 31,2020 | Notes receivable | $600,000 | |
Cash | $600,000 | ||
[To record payment of notes at maturity] |
Amber Mining and Milling, Inc., contracted with Truax Corporation to have constructed a custom-made lathe. The...
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...
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, 2018. Amber paid for the lathe by issuing a $900,000, 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 8% was a reasonable rate of interest. (FV 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 $600,000, three-year note that specified 6% 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 10% was a reasonable rate of interest. (FV 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...
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...
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 $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...
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 $500,000, 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 8% was a reasonable rate of interest. (FV 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 $900,000, 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 8% was a reasonable rate of interest. (FV 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 $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 10% was a reasonable rate of interest. (FV of $1, PV of...