Solution 1:
Let effective interest rate implicit in agreement = i
Now at i present value of annual installment = Fair value of machine
Cumulative PV Factor at i for 4 periods = $9,112,050 / $3,000,000 = 3.03735
Refer PV factor table, this factor falls at i =12%
Therefore implicit interest rate in agreement = 12%
Solution 2 to 4:
Journal Entries - VHF Industries | |||
Date | Particulars | Debit | Credit |
1-Jan-18 | Equipment Dr | $9,112,050.00 | |
To Notes Payable | $9,112,050.00 | ||
(To record equipment purchased on issue of note) | |||
31-Dec-18 | Interest expense Dr ($9,112,050*12%) | $1,093,446.00 | |
Notes Payable Dr | $1,906,554.00 | ||
To Cash | $3,000,000.00 | ||
(To record installment payment) | |||
31-Dec-19 | Interest expense Dr [($9,112,050 - $1,906,554)*12%] | $864,660.00 | |
Notes Payable Dr | $2,135,340.00 | ||
To Cash | $3,000,000.00 | ||
(To record installment payment) |
Solution 5:
Fair value of machine = $3,000,000 * Cumulative PV Factor at 11% for 4 periods
= $3,000,000 * 3.10245 = $9,307,350
Journal Entries - VHF Industries | |||
Date | Particulars | Debit | Credit |
1-Jan-18 | Equipment Dr | $9,307,350.00 | |
To Notes Payable | $9,307,350.00 | ||
(To record equipment purchased on issue of note) |
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