At the beginning of 2018, VHF Industries ecquired a equipment with a fair value

Question

At the beginning of 2018, VHF Industries ecquired a equipment with a fair value of $6,760,200 by issuing a two-year, noninterest- bearing note in the face amount of $8 million. The note is payable in two annual installments of $4 million at the end of each year. (FV of S1, PV of S1. FVA of SJ, PVA of SJ, FVAD of $1 and PVAD of $3 (Use appropriate factorfs) from the tables provided.) Required: 1. What is the effective rate of interest implicit in the agreement? 2 to 4. Prepare the necessary journal entry 5. Suppose the market value of the equipment was unknown at the time of pur chase, but the market rate of interest for notes of similar risk was 17%. Prepare the journal entry to record the purchase of the equipment. Complete this question by entering your answers in the tabs below Required 1Required 2 to What is the effective rate of interest implicit in the agreement? rate Required 2 to 4 >

Explanation / Answer

1 Effective Interest implicit in the agreement Table value i.e PV factor 1.69005 (6760200/4000000) In table, the rate at which the factor is for a time horizon of 2 years = 12% Answer Effective Interest implicit in the agreement 12% Date Account title and Explanation Debit Credit 2 Machine 6760200 Notes Payable 6760200 (To record Purchase of machine) 3 Interest expense 811224 (6760200*.12) Notes Payable 3188776 Cash 4000000 4 Interest expense 428571 (6760200-3188776)*.12 Notes Payable 3571429 Cash 4000000 5 Pv factor at 11% 1.712523 Market value of equipment 6850092 (4000000*1.712523) Date Account title and Explanation Debit Credit Machine 6850092 Notes Payable 6850092 (To record Purchase of machine)

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