Question

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 $5.0 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 8%. (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

Answer:

1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2018.

Date	Description	Debit $	Credit $
January 1, 2018.	Machine	5,000,000
	Installment note payable		5,000,000

_____________________________________________________________________
2. Prepare an amortization schedule for the four-year term of the installment note.

if we look in to the present value table for the 4 year at the rate 8% then,

factor for 4 payments at 8% = 3.31213

Amount of each payment

= $5,000,000 ÷ 3.31213

= $1,509,603

amortization schedule for the four-year term of the installment note is a sunder

Date	Payment	Interest at 8%	Principal =Payment- interest	Balance
Jan-1-18				5,000,000
Dec-31-18	1509603	400000	1109603	3,890,397
Dec-31-19	1509603	311231.76	1198371.24	2,692,026
Dec-31-20	1509603	215362.061	1294240.939	1,397,785
Dec-31-21	1509603	111817.786	1397785.214	0

___________________________________________________________________
3. Prepare the journal entry for the first installment payment on December 31, 2018.

Date	Description	Debit $	Credit $
Dec-31-18	Installment note payable	1,109,603
	Interest expense	400000
	Cash		1509603

4. Prepare the journal entry for the third installment payment on December 31, 2020.

Date	Description	Debit $	Credit $
Dec-31-20	Installment note payable	1,294,241
	Interest expense	215362.1
	Cash		1509603