At the beginning of 2018, VHF Industries acquired a equipment with a fair value
ID: 2340815 • Letter: A
Question
At the beginning of 2018, VHF Industries acquired a equipment with a fair value of $3,169,870 by issuing a four-year, noninterest-bearing note in the face amount of $4 million. The note is payable in four annual installments of $1 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 entry.
5. 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.
Explanation / Answer
1.$3169870/$1000000=3.16987
Present Installment PV
Thus in the table value of N =4 and number 3.16987 is in the 10% column.So 10 % is the implicit rate of interest.
2. Machine -Fair Value $3169870
To Notes Payable $3169870
3. Interest Expense (10% *OS Balance) $316987
Notes Payable (diff) $683013
To Cash $1000000
4. Interest Expense [10%*($3169870-683013)] $248686
Notes Payable (Diff) $751314
To Cash $1000000
5. $1000000*3.2397 = $3239700
the pv factor for N=4 and i=9%
Machine $3239700
To Notes Payable $3239700
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