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, 2011. 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, 2011, 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.