American Food Services Inc acquired a packaging machine from

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2016. In payment for the $4.1 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 11%. (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.

Solution

1) Machine $4,100,000

Notes Payable $4,100,000

2) The amount of each payment needs to be determined before the schedule can be prepared

Table 4 factor, 4 payments @ 10% = 3.10245

Amount of each payment =$4,100,000 / 3.10245 = $13,21,536

3)

Notes Payable $870,536

Interest Expense $4,51,000

Cash $1,321,536

4)

Notes Payable $1,072,588

Interest Expense $248,949

Cash $1,321,536