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 $5.9 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 11%. (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

Answer:

1.Journal Entry for Purchase of Machine on 1st Jan'2021

Date	Particulars	Debit	Credit
01-Jan-21	Machine A/c	$ 59,00,000
	To Instalment Note Payable		$ 59,00,000
	(To Record Purchase of Machine)

2.Amortization Schedule:

Present Value Interest Factors for a $1 Annuity Discounted at 11% for 4 Years = 3.1024,

So,Instalment payable for Each Year

= $59,00,000 /3.1024,

= $19,01,753.48,

= $19,01,753.

Date	Payment	Interest Rate 11%	Principal Amount	Balance
01-01-2021				$ 59,00,000
31-12-2021	$ 19,01,753	$             6,49,000	$             12,52,753	$ 46,47,247
31-12-2022	$ 19,01,753	$             5,11,197	$             13,90,556	$ 32,56,691
31-12-2023	$ 19,01,753	$             3,58,236	$             15,43,517	$ 17,13,174
31-12-2024	$ 19,01,753	$             1,88,579	$             17,13,174	$                 0

Priciple Amount = $19,01,753 - $ 6,49,000 = $12,52,753,

On 31.12.2024 Interst Amount Rounded off 130 rs to Get Balance as Zero.

3.Journal Entry for the First Instalment Payment on 31st December'2021.

Date	Particulars	Debit	Credit
31-Dec-21	Instalment Note Payable A/c	$ 12,52,753
	Interest Expenses A/c	$   6,49,000
	To Cash A/c		$ 19,01,753
	(To Record Payment of 1st Installment)

3.Journal Entry for the Third Instalment Payment on 31st December'2023:

Date	Particulars	Debit	Credit
31-Dec-23	Instalment Note Payable A/c	$ 15,43,517
	Interest Expenses A/c	$   3,58,236
	To Cash A/c		$ 19,01,753
	(To Record Payment of 3rd Installment)

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