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 $500,000, 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. (Fy0 $1. Pyo St. EVA 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

1-a)Price of equipment :[ PVA @ 10%,3*Interest ]+ [PV @10%,3*Face value]

          =[2.48685 * 30000]+ [.75131 * 500000]

          = 74605.5+ 375655

           = $ 450260.50     [Rounded to 450261]

**Interest paid =500000*.06=30000

1-b)

2)

3)

30000

Date Account debit credit Jan1 ,2008 Machinery 450261 Discount on note payable 49739 Note payable 500000 [Being machinery lathe purchased]

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