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.


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.


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
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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