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, 2021. 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 thee 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, 2021. 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, 2021. 4. Prepare the journal entry for the third installment payment on December 31, 2023. Complete this question by entering your answers in the tabs below. Req 2 Req 1 3 and 4 Prepare an amortization schedule for the four-year term of the installment note. (Enter your answers in whole dollars.) Outstanding Balance Decrease in Balance Cash Payment Effective Interest Dec.31 5,000,000 2021 2022 2023 2024 KReq 2 > Req 1 3 and 4

Answer 1

Solution 1:

Journal Entries - American food service
Date	Particulars	Debit	Credit
1-Jan-21	Equipment Dr	$5,000,000.00
	To Notes Payable		$5,000,000.00
	(To record equipment purchased by issue of note)

Solution 2:

Annual installment = $5,000,000 / Cumulative PV factor at 8% for 4 periods

= $5,000,000 / 3.31213 = $1,509,603

Amortization of Installment Note
Year Ending Dec 31	Jan 1, Carrying Amount	Note Payment (Cash Paid)	Interest expense (8% of Jan 1 carrying amount)	Decrease in note payable	Dec 31, carrying amount
31-Dec-21	$5,000,000	$1,509,603	$400,000	$1,109,603	$3,890,397
31-Dec-22	$3,890,397	$1,509,603	$311,232	$1,198,371	$2,692,026
31-Dec-23	$2,692,026	$1,509,603	$215,362	$1,294,241	$1,397,785
31-Dec-24	$1,397,785	$1,509,603	$111,818	$1,397,785	$0

Solution 3:

Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-21	Interest expense Dr	$400,000.00
	Notes payable Dr	$1,109,603.00
	To Cash		$1,509,603.00
	(To record installment payment)

Solution 4:

Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-23	Interest expense Dr	$215,362.00
	Notes payable Dr	$1,294,241.00
	To Cash		$1,509,603.00
	(To record installment payment)