Question

American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. The lease agreement for the $4 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Barton's implicit interest rate was 10%. (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 at the beginning of the lease on January 1, 2021. 2. Prepare an amortization schedule for the four-year term of the lease. 3. & 4. Prepare the appropriate entries related to the lease on December 31, 2021 and 2023.

Answer 1

Solution 1:

Journal Entries - American food service
Date	Particulars	Debit	Credit
01-Jan-21	Equipment Dr	$40,00,000
	To Notes Payable		$40,00,000
	(To record equipment purchased by issue of note)

Solution 2:

Annual payment on note = $4,000,000 / Cumulative PV factor at 10% for 4 periods

= $4,600,000 / 3.16987 = $1,261,881

Amortization of Installment Note
Year Ending Dec 31	Jan 1, Carrying Amount	Note Payment (Cash Paid)	Interest expense (10% of Jan 1 carrying amount)	Decrease in note payable	Dec 31, carrying amount
31-Dec-21	$40,00,000	$12,61,881	$4,00,000	$8,61,881	$31,38,119
31-Dec-22	$31,38,119	$12,61,881	$3,13,812	$9,48,069	$21,90,050
31-Dec-23	$21,90,050	$12,61,881	$2,19,005	$10,42,876	$11,47,174
31-Dec-24	$11,47,174	$12,61,881	$1,14,707	$11,47,174	$0
		$50,47,524	$10,47,524	$40,00,000

Solution 3 and 4:

Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-21	Interest expense Dr	$4,00,000
	Notes payable Dr	$8,61,881
	To Cash		$12,61,881
	(To record installment payment)
Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-23	Interest expense Dr	$2,19,005
	Notes payable Dr	$10,42,876
	To Cash		$12,61,881
	(To record installment payment)