Note with unrealistic interest rate; lender; amortization schedule
Response to the following:
Refer to the situation described in problem 1.
Required:
1. Prepare the journal entry on January 1, 2016, for Truax Corporation's sale 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 for Truax.
Problem 1:
Note with unrealistic interest rate; borrower; amortization schedule
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, 2016. Amber paid for the lathe by issuing a $600,000, 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 12% was a reasonable rate of interest.
Required:
1. Prepare the journal entry on January 1, 2016, 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.