Amber Mining and Milling, Inc., contracted with Truax Corporation to have constr

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, 2018. Amber paid for the lathe by issuing a $750,000, three-year note that specified 4% 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, 2018, 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

Explanation / Answer

Required 1-a

30000

(750000*4%)

75939

Pvifa@9%,3yrs

(30000*2.53129)

579135

Pvif@9%,3yrs

(750000*0.77218

Required 1-b

Required 2

58957

(655074*9%)

684031

(655704+28957)

61563

(684031*9%)

3

Total

30000

90000

64406

184927

34406

94926

750000

-

Required 3

Cash flow amount present value Interest

30000

(750000*4%)

75939

Pvifa@9%,3yrs

(30000*2.53129)

Principal 750000

579135

Pvif@9%,3yrs

(750000*0.77218

Price of machinery 655074

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