The Liu Group, Inc., manufactures various kinds of hydraulic pumps. In June 2024, the company signed a fouryear purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Liu has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Liu to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Liu will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%). Liu’s chief accountant has proposed recording the note receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years would then be recorded at the actual prices paid.

Required:
You do not agree with the chief accountant’s valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid.
1. What entry would you use to account for the initial transaction?
2. What entry would you use to account for the subsequent purchase of 25,000 units of the component for $650,000 when it’s market value is $26.60 per unit?