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, 2021. 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, 2021, 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.

Amber Mining and Milling, Inc., contracted with Truax…

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Requirement 1a:

Interest payment = $750,000 x 4% = $30,000

Present value of interest payments	$75,939
[$30,000 x 2.53129 present value annuity factor (9%, 3 years)]
Present value of Face value	$579,135
[$750,000 x 0.77218 present value factor (9%, 3 years)]
Price of the equipment	$655,074

Requirement 1b:

Date	Account title and Explanation	Debit	Credit
Jan 1,2021	Equipment	$655,074
	Discount on bonds payable	$94,926
	Bonds payable		$750,000
	[To record issuance of bonds for equipment]

Requirement 2:

Date	Cash Payment	Effective Interest	Discount amortized	Carrying value
1/1/21				$655,074
12/31/21	$30,000	$58,957	$28,957	$684,031
12/31/22	$30,000	$61,563	$31,563	$715,593
12/31/23	$30,000	$64,403	$34,407*	$750,000
Total	$90,000	$184,923	$94,926

*rounded by adding 4 for calculations

Cash payment = $750,000 x 4% = $30,000

Effective interest = Preceding carrying value x 9%

Discount amortized = Effective interest - Cash payment

Carrying value = Preceding carrying value + Discount amortized

Requirement 3:

(a)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2021	Interest expense	$58,957
		Discount on bonds payable		$28,957
		Cash		$30,000
		[To record interest payment]

	Dec 31,2022	Interest expense	$61,563
		Discount on bonds payable		$31,563
		Cash		$30,000
		[To record interest payment]

	Dec 31,2023	Interest expense	$64,403
		Discount on bonds payable		$34,407
		Cash		$3,000
		[To record interest payment]

(b)	Date	Account title and Explanation	Debit	Credit
	Dec 31,2023	Notes payable	$750,000
		Cash		$750,000
		[To record payment of note at maturity]

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