Question

At the beginning of 2016, VHF Industries acquired a equipment with a fair value of $6,339,740 by issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is payable in four annual installments of $2 million at the end of each year.

1. What is the effective rate of interest implicit in the agreement?

2. Record these three transactions: 01/01/2016 purchase of the equipment, interest expense on 31/12/2016, and interest expense on 31/12/2017.

3. Suppose the market value of the equipment was unknown at the time of purchase, but the market rate of interest for notes of similar risk was 9%. Prepare the journal entry to record the purchase of the equipment on 01/01/2016.

Enter your answers as whole dollars.

Answer 1

1)
Present Value	$6,339,740.00
Period	4
Annual Payment	$2,000,000.00
Effective rate of interest implicit = Rate(4,2000000,-6339740)	10.00%
2)
Date	Account Titles & Explanation	Debit	Credit
01/01/2016	Equipment	$6,339,740.00
	Installment Notes Payable		$6,339,740.00
12/31/2016	Installment Notes Payable	$1,366,026.00
	Interest Expense	$633,974.00
	Cash		$2,000,000.00
12/31/2017	Installment Notes Payable	$1,502,629
	Interest Expense	$497,371
	Cash		$2,000,000.00
Date	Payment	Interest @ 10%	Principal	Balance
1/1/2013				$6,339,740.00
12/31/2016	$2,000,000.00	$633,974.00	$1,366,026.00	$4,973,714.00
12/31/2017	$2,000,000.00	$497,371.40	$1,502,628.60	$3,471,085.40
12/31/2018	$2,000,000.00	$347,108.54	$1,652,891.46	$1,818,193.94
12/31/2019	$2,000,000.00	$181,819.39	$1,818,193.94	$0.00
3)
Annual Payment	$2,000,000.00
Period	4
Rate	9.00%
Present Value =PV(9%,4,-$2000000)	$6,479,439.75
Date	Account Titles & Explanation	Debit	Credit
01/01/2016	Equipment	$6,479,440
	Installment Notes Payable		$6,479,440