Question

I need to see steps for my understanding

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. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Req 3 and 4 Prepare an amortization schedule for the four-year term of the lease. (Enter your answers in whole dollars and not in millions. Round your answers to the nearest whole dollar. Enter all amounts as positive values.) Lease Amortization Schedule Effective Decrease in Interest Balance Lease Payments Year Outstanding Balance 1,261,881 1,261,881 2021 2022 2023 2024 Total 2,523,7620 0 < Req1 Req 3 and 4 >

Answer 1

Solution 1:

Journal Entries - American food service
Date	Particulars	Debit	Credit
1-Jan-21	Equipment Dr	$4,000,000.00
	To Lease Payable		$4,000,000.00
	(To record equipment purchased on lease)

Solution 2:

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

= $4,000,000 / 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	$4,000,000	$1,261,881	$400,000	$861,881	$3,138,119
31-Dec-22	$3,138,119	$1,261,881	$313,812	$948,069	$2,190,050
31-Dec-23	$2,190,050	$1,261,881	$219,005	$1,042,876	$1,147,174
31-Dec-24	$1,147,174	$1,261,881	$114,707	$1,147,174	$0
		$5,047,524	$1,047,524	$4,000,000

solution 3 & 4:

Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-21	Interest expense Dr	$400,000.00
	Lease payable	$861,881.00
	To Cash		$1,261,881.00
	(To record lease payment)

Journal Entries - American food service
Date	Particulars	Debit	Credit
31-Dec-23	Interest expense Dr	$219,005.00
	Notes payable Dr	$1,042,876.00
	To Cash		$1,261,881.00
	(To record installment payment)