While reading a recent issue ofMedical News,Sylvia Brandt noticed an ad for equipment that she had been seeking for use in her business. The ad offered oxygen therapy equipment under the following terms:

Model AM 78962

$204,000 zero interest loan

Quarterly payments of $17,000 for only 3 years

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

Required:

How would you advise Ms. Brandt on the purchase she is considering, for each of the scenarios below?

1. Assume the market rate of interest at the time for this type of transaction is 8%. At what amount should she 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?