1. 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 VHFs journal entry to record the acquisition of this machine on 1/1/13. VHF does not use any discount or premium accounts in its chart of accounts.

Requirement 4: Determine the implicit market rate that VHF must use to recognize interest expense for this non-cash loan.

2. On January 1, 2013, Queen Corporation issued 12-year, 6% bonds payable with a face value of $10 million. The bonds require semi-annual coupon payments on June 30 and December 31 every year.

Fill in the blanks below to show the amounts and timing for contractual future cash flows for these bonds.

Lump-sum payment due at maturity (FV) = _________

Amount of each semi-annual coupon payment (pmt) = ________

Number of compounding periods from issue date to maturity = _________

Total cash outflows required by these bonds = ___________

For this question, fill in the blanks below with the value of Queens bonds on 1/1/13. The value represents the cash proceeds that Queen would receive when issuing these bonds.

(Annual) Market interest rate = 5% _____________

(Annual) Market interest rate = 8.3% ______________

Quoted market price = 92 ________________

For this question, assume that Queen issued these bonds on 1/1/13 in exchange for cash of $8,899,162. For the journal entries, you may choose to use a companion account or not.

Did Queen issue these bonds at par, premium, or discount?

What was the market interest rate PER PERIOD on 1/1/13?

Prepare Queens journal entry to recognize the issuance of these bonds on 1/1/13.

Prepare Queens journal entry to recognize the coupon payment on 6/30/13.

Explain in words how you calculated the interest expense amount in your 6/30/13 journal entry.