Holly Springs, Inc. contracted with Coldwater Corporation to
have constructed a custom-made lathe. The machine was completed and
ready for use on January 1, 2021. Holly Springs paid for the lathe
by issuing a $230,000 note due in three years. Interest, specified
at 3%, was 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 for which 7% was a reasonable
rate of interest. Holly Springs uses the effective interest method
of amortization. (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. Prepare the journal entry on January 1, 2021,
for Holly Springs’ 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.
In the Present question :- | ||||||
Amount of Note | $230,000.00 | |||||
Coupon rate | 3.00% | |||||
Years | 3 | |||||
Reasonable Rate | 7.00% | |||||
Yearly Interest | $6,900.00 | (230000*3%) | ||||
Payment and Discounting Chart is as follows:- | ||||||
1 | 0.9346 | $6,900.00 | $6,448.74 | |||
2 | 0.8734 | $6,900.00 | $6,026.46 | |||
3 | 0.8163 | $236,900.00 | $193,381.47 | |||
TOTAL | $205,856.67 | |||||
1.) | ||||||
Prepare the journal entry on January 1, 2021, for Holly Springs' purchase of the Lathe | ||||||
Description | Amount(Dr.) | Amount(Cr.) | ||||
Lathe | $205,856.67 | |||||
Discount on Note Payable | $24,143.33 | |||||
3 % Note Payable | $230,000.00 | |||||
(Lathe Purchased by 3 % Note) | ||||||
2.) | ||||||
Ammortization Schedule | ||||||
A | B | C | D | E | F | G |
Interest | Interest | Ammortizing | Debit bal. | Credit Bal. | Book Value | |
Payment | Expense | Note Discount | in the account | in the account | of Note | |
3% * Face | Mkt 7 % * G | C minus B | Note Discount | Notes Payable | F Minus E | |
01/01/2021 | $24,143.33 | $205,856.67 | ||||
31/12/2021 | $6,900.00 | $14,409.97 | $7,509.97 | $16,633.36 | $230,000.00 | $213,366.64 |
31/12/2022 | $6,900.00 | $14,935.66 | $8,035.66 | $8,597.70 | $230,000.00 | $221,402.30 |
31/12/2023 | $6,900.00 | $15,498.16 | $8,597.70 | $0.00 | $230,000.00 | $0.00 |
3.) | ||||||
Journal Entries | ||||||
Date | Description | Amount(Dr.) | Amount(Cr.) | |||
31/12/2021 | Interest Expense | $14,409.97 | ||||
Discount on Notes Payable | $7,509.97 | |||||
Cash | $6,900.00 | |||||
(Interest Paid for the Year ended ) | ||||||
31/12/2022 | Interest Expense | $14,935.66 | ||||
Discount on Notes Payable | $8,035.66 | |||||
Cash | $6,900.00 | |||||
(Interest Paid for the Year ended ) | ||||||
31/12/2023 | Interest Expense | $15,498.16 | ||||
Discount on Notes Payable | $8,597.70 | |||||
Cash | $6,900.00 | |||||
(Interest Paid for the Year ended ) | ||||||
31/12/2023 | 3 % Note Payable | $230,000.00 | ||||
Cash | $230,000.00 | |||||
(Note Paid off at the end of 3 rd Year) |
THANKS & REGARDS
HOPING FOR A POSITIVE RESPONSE
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