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.