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, 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.

Solution

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

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