4.Amber Mining and Milling, In
4.Amber Mining and Milling, Inc., contracted with TruaxCorporation to have constructed a custom-made lathe. The machinewas completed and ready for use on January 1, 2021. Amber paid forthe lathe by issuing a $600,000, three year note that specified 4%interest, payable annually on December 31 of each year. The cashmarket price of the lathe was unknown. It was determined bycomparison with similar transactions that 12% was a reasonable rateof interest.
Required:
1. Prepare the journal entry on January 1, 2021, for AmberMining and Milling’s purchase of the lathe.
2. Prepare an amortization schedule for the three-year term ofthe note.
3.Prepare the journal entries to record (a) interest for each ofthe three years and (b) payment of the note at maturity.
Answer:
| Working Note :- Computation of Price ofMachinery | |
| PV ofInterest of Note Payable(600000*4%*2.40183) | $57,644 |
| PV ofFace Value of Note Payable(600000*0.71178) | $427,068 |
| Price of Machinery | $484,712 |
| Part-1 Journal Entry- Amber Mining nd MillingInc. | |||
| Date | Account Tittle | Debit | Credit |
| 1-Jan | Machinery ( As per Working Note) | $484,712.00 | |
| Discount on Note Payable | $115,288.00 | ||
| Note Payable | $600,000.00 | ||
| Part-2: Amortization Schedule | ||||
| Year | Cash Payment | Effective interest | Increase in balance | Carrying Value |
| $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 | |
| Part-3 Journal Entry- Amber Mining nd MillingInc. | |||
| Date | Account Tittle | Debit | Credit |
| 31-Dec-21 | Interest Expense | $58,615.00 | |
| Discount on Note Payable | $34,615.00 | ||
| Cash | $24,000.00 | ||
| 31-Dec-21 | Interest Expense | $62,265.00 | |
| Discount on Note Payable | $38,265.00 | ||
| Cash | $24,000.00 | ||
| 31-Dec-21 | Interest Expense | $66,857.00 | |
| Discount on Note Payable | $42,857.00 | ||
| Cash | $24,000.00 | ||
| 31-Dec-21 | Note Payable | $600,000.00 | |
| Cash | $600,000.00 | ||
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