American Food Services, Inc., acquired a packaging machine from Barton and Barto

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, 2018. In payment for the $4.2 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, 2018.
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, 2018.
4. Prepare the journal entry for the third installment payment on December 31, 2020.

Explanation / Answer

1) Journal Entry :-

2) Amortization Schedule for the four year term of the lease.

Lease Payment :-

= $4200000 / 3.03735*

= $1382784

* Present Value of an ordinary annuity of $1 : n = 4, i = 12%

3) Appropriate Journal Entries :-

4) Appropriate Journal Entries :-

Date Particulars Debit($) Credit($) Jan. 1, 2018 Right of use asset A/c Dr. 4200000 To Lease Payable A/c 4200000

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