Question

At the beginning of 2021, VHF Industries acquired a machine with a fair value of $5,070,150 by issuing a two-year, noninterest-bearing note in the face amount of $6 million. The note is payable in two annual installments of $3 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

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

	Interest rate %

2.Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollar.)

No	Date	General Journal	Debit	Credit
1	January 01, 2021	Accounts receivable
		Equipment
2	December 31, 2021	Cash
		Interest expense

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 11%. Prepare the journal entry to record the purchase of the equipment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollar.)

No	Date	General Journal	Debit	Credit
1	January 01, 2021	Cash
		Interest expense

Answer 1

Answer a.

Face Value of Note = $6,000,000
Issue Value of Note = $5,070,150
Annual Payment = $3,000,000
Time Period = 2 years

Let Interest Rate be i%

$5,070,150 = $3,000,000 * PVA of $1 (i%, 2)
PVA of $1 (i%, 2) = 1.69005

Using PVA of $1 table, i = 12.00%

Interest Rate = 12.00%

Answer b.

Answer c.

Face Value of Note = $6,000,000
Annual Payment = $3,000,000
Time Period = 2 years
Interest Rate = 11.00%

Issue Value of Note = $3,000,000 * PVA of $1 (11.00%, 2)
Issue Value of Note = $3,000,000 * 1.71252
Issue Value of Note = $5,137,560