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 $750,000, 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.

Table values are based on: n = 9.0% Cash Flow Amount Interest $ 37,500 Principal $ 750,000 Price of equipment $ Present Value 94,923 579,150 $ 674,073 $

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.

Answer 1

Amber Mining and Milling, Inc. Requirement 1A. Table Values are based on n= 3 1 = 9% Cashflow Amount Present Value Interest 37500 9 4923 Principal 750000 750000 579135 Price of Equipment 674058 Interest = 37500 x 2.53129 94923 Principal = 750000 x 0.77218 579135 Present value (price) of the bonds 674058 Present value of an ordinary annuity of $1: n = 3,1 = 9% (PVA of $1) Present value of $1: n = 3, i = 9% (PV of $1) Requirement 2 Cash Payment 37500 37500 37500 112500 Effective Increase in Oustanding Interest Balance Balance 674058 60665 23165 697224 62750 25250 722474 65027 27527 750000 188442 75942 Total

Requirement 1B. Journal Enteries Date Particulars Debit in $ Credit in $ 1.1.2021 Equipment a/c Dr. 674058 Discount on Notes Payable a/c Dr. 75942 To Notes Payable 750000 Requirement 3. Journal Enteries Event Particulars Debit in $ Credit in $ 1 Interest Expense a/c Dr. 60665 To Discount on Notes Payable To Cash 37500 23165 62750 Interest Expense a/c Dr. To Discount on Notes Payable To Cash 25250 37500 65027 Interest Expense a/c Dr. To Discount on Notes Payable To Cash 27527 65027 Dr. 750000 Notes Payable a/c To Cash 750000