At the beginning of 2018, VHF Industries acquired a equipment
with a fair value of $8,710,520 by issuing a six-year,
noninterest-bearing note in the face amount of $12 million. The
note is payable in six annual installments of $2 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.
![TABLE 6 Present Value of an Annuity Due of $1 PVAD = (1 - 17+ iP]x (1 +) n/i 1 2 3 4 5 1.0% 1.00000 1.99010 2.97040 3.94099 4](http://img.homeworklib.com/questions/5bd1b550-78e7-11ea-8e28-81e957421b91.jpg?x-oss-process=image/resize,w_560)
Homework Answers
Answer:
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 6 periods = $8710520/ $2,000,000 = 4.3553
Refer PV factor table, this factor falls at i =10%
Therefore implicit interest rate in agreement = 10%
2-4:)
| Journal Entries - VHF Industries | |||
| Date | Particulars | Debit | Credit |
| 01-Jan-18 | Equipment Dr | $8,710,520 | |
| To Notes Payable | $8,710,520 | ||
| (To record equipment purchased on issue of note) | |||
| 31-Dec-18 | Interest expense Dr ($8710520*10%) | $871,052 | |
| Notes Payable Dr | $1,128,948 | ||
| To Cash | $2,000,000 | ||
| (To record installment payment) | |||
| 31-Dec-19 | Interest expense Dr [($8710520- $1128948)*10%] | $758,157 | |
| Notes Payable Dr | $1,241,843 | ||
| To Cash | $2,000,000 | ||
| (To record installment payment) |
Solution 5:
Fair value of machine = $2,000,000 * Cumulative PV Factor at 9% for 6 periods
= $2,000,000 * 4.48592 = $8,971,840
| Journal Entries - VHF Industries | |||
| Date | Particulars | Debit | Credit |
| 01-Jan-18 | Equipment Dr | $8,971,840 | |
| To Notes Payable | $8,970,840 | ||
| (To record equipment purchased on issue of note) |
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