E14-18 Note with unrealistic interest rate; lender; amortization schedule. Amber Mining and Miling, Inc., contracted with Truax

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3 years ago

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E14-18 Note with unrealistic interest rate; lender; amortization schedule. Amber Mining and Miling, Inc., contracted with Truax

Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2016. Amber paid for the lathe by issuing a $600,000, 3 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 12% was a reasonable rate of interest.1. Prepare the journal entry on January 1, 2016 for Truax Corporation's sale of the lathe.2. Prepare and 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 the maturity for Truax.

Business

1 answer:

Serhud [2] · Answer 1 · 2022-07-27T17:12:31+03:00

Answer:

Explanation:

To find the fair value of bond we calculate the present value of future cashflows at 12% market rate.

No. of cashflows Cashflows Discount factor Present value

3 24000 2.401831268 57643.95044

1 600000 0.711780248 427068.1487

484712.0991

1) Entries

invest at amortized cost 600000

Asset 484712

Gain 115287.91

2) Amortization Schedule

Year Amount IRR 7% CR 4% Closing

1 600000 72000 -24000 648000

2 648000 77760 -24000 701760

3 701760 84211.2 -24000 761971

3)

Year-1

Cash 24000

Investment 48000

interest Income 72000

To record the interest income

Year-2

Cash 24000

Investment 53760

interest Income 77760

To record the interest income

Year-3

Cash 24000

Investment 60211

interest Income 84211

To record the interest income

year-3

Cash 761971

Investment 761971

To record the maturity of investment