At the beginning of 2016, VHF Industries acquired a machine with a fair value of $6,074,700 by issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is payable in four annual installments of $2 million at the end of each year.
1. What is the effective rate of interest implicit in the agreement?
2. Prepare the journal entry to record the purchase of the machine.
3. Prepare the journal entry to record the first installment payment at December 31, 2016.
4. Prepare the journal entry to record the second installment payment at December 31, 2017.
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.
The Solution finds the effective rate of interest and provides example journal entries for the installment note.