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 $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 $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. Reg 1A Reg 1B Reg 2 Reg 3 Complete the table below to determine the price of the equipment. (Round final answers to the nearest whole dollar.) Table values are based on: Cash Flow Amount Present Value Interest Principal

Answer 1

Part 1-a

Table values are based on:
n =	3
i =	10.0%
Cash flow	Amount	Present value
Interest	36000	89527
Principal	600000	450786
Price of machinery		$540313

Interest	36000	X	2.48685	=	89527
principal	600000	x	0.75131	=	450786
Present value (price) of the notes					540313

600000*6% = 36000

Present value of an ordinary annuity of $1: n= 3, i= 10% =2.48685

Present value of $1: n= 3, i= 10% =0.75131

Part 1-b

Date	General Journal	Debit	Credit
January 1, 2021	Machinery	540313
	Discount on notes payable (600000-540313)	59687
	Notes payable		600000
	(to record the purchase of the lathe)

Part 2

amortization schedule

	Cash Payment	Effective interest	Increase in balance	Carrying Value
57				540313
1	36000	54031	18031	558344
2	36000	55834	19834	578178
3	36000	14178	21822	600000
Total	108000	167688	59688

Cash payment = 60000*6% = 36000

Effective interest = previous carrying value *10%

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	54031
	Discount on notes payable		18031
	Cash		36000
	(to record first interest payment)
2	Interest expense	55834
	Discount on notes payable		19834
	Cash		36000
	(to record second interest payment)
3	Interest expense	57822
	Discount on notes payable		21822
	Cash		36000
	(to record third interest payment)
4	Notes payable	600000
	Cash		600000
	(to payment of note at maturity)