Answer:
1) we can use the present value of an ordinary annuity formula to calculate the effective interest rate:
present value = annual payment x PV annuity factor (%, 4 periods)
9,112,050 = 3,000,000 x PV annuity factor (%, 4 periods)
PV annuity factor (%, 4 periods) = 9,112,050 / 3,000,000 = 3.03735
using a present value table, the % for 4 periods = 12%
2 to 4) January 2, 2018, equipment purchased by issuing non-interest-bearing note
Dr Equipment 9,112,050
Dr Discount on notes payable 2,887,950
Cr Notes payable 12,000,000
December 31, 2018, first installment paid on notes payable
Dr Notes payable 3,000,000
Dr Interest expense 1,093,446
Cr Cash 3,000,000
Cr Discount on notes payable 1,093,446
interest expense = 9,112,050 x 12% = 1,093,446
December 31, 2019, second installment paid on notes payable
Dr Notes payable 3,000,000
Dr Interest expense 864,660
Cr Cash 3,000,000
Cr Discount on notes payable 864,660
interest expense = 7,205,496 x 12% = 864,659.52 ≈ 864,660
December 31, 2020, third installment paid on notes payable
Dr Notes payable 3,000,000
Dr Interest expense 608,419
Cr Cash 3,000,000
Cr Discount on notes payable 608,419
interest expense = 5,070,156 x 12% = 608,418.72 ≈ 608,419
December 31, 2021, fourth installment paid on notes payable
Dr Notes payable 3,000,000
Dr Interest expense 321,425
Cr Cash 3,000,000
Cr Discount on notes payable 321,425
5) present value of equipment = 3,000,000 x 3.1024 (PV annuity factor, 115, 4 periods) = 9,307,200
Dr Equipment 9,307,200
Dr Discount on notes payable 2,692,800
Cr Notes payable 12,000,000
