FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Problem 2: On January 1, 2013, VHF Industries acquired a machine and financed the purchase price of this acquisition by issuing a 4-year loan to the vendor. The face value of the loan is $8,000,000. The loan requires VHF to make 4 annual installment payments of $2,100,990; each payment is due December 31 starting on December 31, 2013. VHF chose to finance this purchase using the non-cash loan, but VHF could have purchased the machine for a cash price of $6,074,700. VHF must use the effective interest method to account for this loan in accordance with GAAP.
Requirement 1: Based on the contract (form) information for this non-cash loan, what is the stated interest rate (show your calculation details)?
Requirement 2: State whether substance equals form or substance differs from form. Then provide an explanation to support your answer.
Requirement 3: Prepare VHF’s
Equipment 6074700
Notes payable 6074700
Requirement 4: Determine the implicit market rate that VHF must use to recognize interest expense for this non-cash loan.
6074700= 2100990 *
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