On January 1, 2013, the Tiger Company bought some equipment that had a fair mark

Question

On January 1, 2013, the Tiger Company bought some equipment that had a fair market value (FMV) of $6,074,700. To accomplish the purchase, the company issued an installment note that is payable in four equal installments of $2 million at the end of each year. What is the effective rate of interest implicit in the agreement? Prepare the journal entry to record the purchase of the equipment. Prepare the journal entry to record the first installment payment at December 31, 2013. Prepare the journal entry to record the second installment payment at December 31, 2014. Suppose the market value of the equipment had been 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.

Explanation / Answer

Solution.

Fair market value of equipmrnt = $6,074,700

Bills Payable                          = $8,000,000

Interst                                     = $1,925,300

Annual interest = $1,925,300 / 4 = $481,325

$481,325 / $6,074,700 = 7.92%

B.

Equipmentaccount debited $8,000,000

Account payable credited $8,000,000

C.

Account payable dedited $2,000,000

Bills payable account credited $2,000,000.

D.

Account payable dedited $4,000,000

Bills payable account credited $4,000,000.

E.

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