Question

Check my work At the beginning of 2021, VHF Industries acquired a machine 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 $1. PV of $1. EVA of $1. PVA of $1, FVAD of $1 and PVAD of $9 (Use appropriate factor(s) from the tables provided.) 2.24 points Skipped 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. eBook Print Complete this question by entering your answers in the tabs below. Required 1 Required 2 to Required 5 What is the effective rate of interest implicit in the agreement? Interest rate % Required 2 to 4 >

Answer 1

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 2 periods = $6,760,200 / $4,000,000 = 1.69005

Refer PV factor table, this factor falls at i =12%

Therefore implicit interest rate in agreement = 12%

Solution 2-4:

Journal Entries - VHF Industries
Date	Particulars	Debit	Credit
1-Jan-21	Equipment Dr	$6,760,200.00
	To Notes Payable		$6,760,200.00
	(To record equipment purchased on issue of note)
31-Dec-21	Interest expense Dr ($6,760,200*12%)	$811,224.00
	Notes Payable Dr	$3,188,776.00
	To Cash		$4,000,000.00
	(To record installment payment)
31-Dec-22	Interest expense Dr [($6,760,200 - $3,188,776)*12%]	$428,576.00
	Notes Payable Dr	$3,571,424.00
	To Cash		$4,000,000.00
	(To record installment payment)

Solution 5:

Fair value of machine = $4,000,000 * Cumulative PV Factor at 11% for 2 periods

= $4,000,000 * 1.71252 = $6,850,080