Exercise 14-18
American Food Services, Inc., acquired a packaging machine from
Barton and Barton Corporation. Barton and Barton completed
construction on the machine on January 1, 2013. In payment for the
$4 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 10%.
Part 1: Prepare the entry for American Food Services’ purchase of the
machine on Januaryy 1,, 2013.
Machine
4,000,000
Installment note payable
4,000,000
©Dr. Chula King
All Rights Reserved
Exercise 14-18 (continued)
Part 2: Prepare an amortization schedule for the four-year term of the
installment note.
The amount of each payment needs to be determined before the schedule
can be prepared.
Table 4 factor, 4 payments @ 10% = 3.16987
Amount of each payment = $4,000,000 ÷ 3.16987 = $1,261,881
Date
Payment
Interest:
10% x
Balance
Principal:
Payment –
Interest
1/1/13
Balance
4,000,000
12/31/13
1,261,881
400,000
861,881
3,138,119
12/31/14
1,261,881
313,812
948,069
2,190,050
12/31/15
1,261,881
219,005
1,042,876
1,147,174
12/31/16
1,261,881
114,707*
1,147,174
-0-
*Rounded to force balance to zero.
©Dr. Chula King
All Rights Reserved
Exercise 14-18 (continued)
Part 3: Prepare the journal entry for the first installment payment on
December 31, 2013.
Installment note payable
861,881
Interest expense
400,000
Cash
1,261,881
Part 4: Prepare the journal entry for the third installment payment on
December 31, 2015.
Installment note payable
1,042,876
Interest expense
219,005
Cash
1,261,881
©Dr. Chula King
All Rights Reserved