Ask Question
19 December, 18:03

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.

+5
Answers (1)
  1. 19 December, 20:46
    0
    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
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “E14-18 Note with unrealistic interest rate; lender; amortization schedule. Amber Mining and Miling, Inc., contracted with Truax Corporation ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers