Question

t the beginning of 2021, VHF Industries acquired a machine with a fair value of $6,074,700 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. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. What is the effective rate of interest implicit in the agreement?
2. to 4. Prepare the necessary journal entries.
5. Suppose the market value of the machine 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 machine.

Answer 1

1

Calculator
Inputs:
PV	6,074,700
PMT	(2,000,000)
FV	-
N	4
Output:
I/Y = IRR=	12.00%

Rate implicit is 12%

2

Account	Debit	Credit
Machine	6,074,700
Discount on note payable	1,925,300
Note payable		8,000,000

3

Present value of note:

a	Present value of annuity=	P* [ [1- (1+r)-n ]/r ]
P=	Periodic payment	2,000,000.00
r=	Rate of interest per period
	Annual interest	11.00%
	Number of payments per year	1
	Interest rate per period	0.11/1=
	Interest rate per period	11.000%
n=	number of periods:
	Number of years	4
	Periods per year	1
	number of payments	4
	Present value of annuity=	2000000* [ (1- (1+0.11)^-4)/0.11 ]
	Present value of annuity=	6,204,891.38

Entry will be:

Account	Debit	Credit
Machine	6,204,891.38
Discount on note payable	1,795,108.62
Note payable		8,000,000