Answer:
a. What is the effective rate of interest implicit in the agreement?
I used an Excel spreadsheet and the RATE function:
PV = 4,803,660
FV = 6,000,000 (optional)
Nper = 3
Payment = -2,000,000
Rate = 12%
b. Prepare the necessary journal entry.
Dr Machinery 4,803,660
Dr Discount on notes payable 1,196,340
Cr Notes payable 6,000,000
c. 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 11%. Prepare the journal entry to record the purchase of the equipment.
we would need to determine the present value, again using an Excel spreadsheet and the PV function:
PV = $4,887,429.43 ≈ $4,887,429
Dr Machinery 4,887,429
Dr Discount on notes payable 1,112,571
Cr Notes payable 6,000,000
