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 $4.8 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 12%. (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.

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
1/1/2021	Machine	$3,644,819
	Notes payable		$3,644,819
	[To record purchase of machine]

Calculations:

Installment = $4,800,000 ÷ 4 = $1,200,000

Purchase price = $1,200,000 x 3.037349 present value annuity factor (12%, 4 years) = $3,644,819

Requirement 2:

Amortization Schedule
Year	Cash paid	Interest expense	Decrease in value	Carrying value
1/1/2021				$3,644,819
12/31/2021	$1,200,000	$437,378	$762,622	$2,882,197
12/31/2022	$1,200,000	$345,864	$854,136	$2,028,061
12/31/2023	$1,200,000	$243,367	$956,633	$1,071,428
12/31/2024	$1,200,000	$128,571	$1,071,429	$0

Cash paid = Installment paid

Interest expense = Preceding carrying value x 12%

Decrease in value = Cash paid - Interest expense

Carrying value = Preceding carrying value - Decrease in value.

Requirement 3:

Date	Account title and Explanation	Debit	Credit
12/31/2021	Interest expense	$437,378
	Notes payable	$762,622
	Cash		$1,200,000
	[To record payment of first installment]

Requirement 4:

Date	Account title and Explanation	Debit	Credit
12/31/2023	Interest expense	$243,367
	Notes payable	$956,633
	Cash		$1,200,000
	[To record payment of first installment]