While reading a recent issue of Health & Fitness, a trade journal, Brandon Wilde noticed an ad for equipment he had been seeking for use in his business. The ad offered oxygen therapy equipment under the following terms:

Model BL 44582

$204,000 zero interest loan

Quarterly payments of $17,000 for only 3 years

The ad captured Wilde’s attention, in part, because he recently had been concerned that the interest charges incurred by his business were getting out of line. The price, though, was somewhat higher than prices for this model he had seen elsewhere.

Required:

You are asked to advise Mr. Wilde on the purchase he is considering.

1. Assume the market rate of interest at the time for this type of transaction is 8%. At what amount should he record the asset purchased and the liability used to purchase it?

2. Assume the market rate of interest is unknown but we know the cash price of the equipment is $185,430. What is the effective rate of interest?