Question

Exercise 14-20 Installment note; amortization schedule [LO14-3]

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2018. In payment for the $4.3 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2018.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2018.
4. Prepare the journal entry for the third installment payment on December 31, 2020.

Answer 1

Solution 1:

Journal Entries - American Food Services
Date	Particulars	Debit	Credit
1-Jan-18	Equipment Dr	$4,300,000.00
	To Notes payable		$4,300,000.00
	(To record purchase of machine by issue of note)

Solution 2:

Annual Installment amount = $4,300,000 / Cumulative PV factor at 9% for 4 periods

= $4,300,000 / 3.23972 = $1,327,275

Note Amortization Schedule
Date	Debit Interest expense	Debit Notes Payable	Credit Cash	Carrying value of Note
1-Jan-18				$4,300,000
31-Dec-18	$387,000	$940,275	$1,327,275	$3,359,725
31-Dec-19	$302,375	$1,024,900	$1,327,275	$2,334,825
31-Dec-20	$210,134	$1,117,141	$1,327,275	$1,217,685
31-Dec-21	$109,591	$1,217,684	$1,327,275	$0

Solution 3:

Journal Entries - American Food Services
Date	Particulars	Debit	Credit
31-Dec-18	Interest expense Dr	$387,000.00
	Notes Payable Dr	$940,275.00
	To Cash		$1,327,275.00
	(To record installment payment)

Solution 4:

Journal Entries - American Food Services
Date	Particulars	Debit	Credit
31-Dec-20	Interest expense Dr	$210,134.00
	Notes Payable Dr	$1,117,141.00
	To Cash		$1,327,275.00
	(To record installment payment)