Question

Installment note; amortization schedule American Food Services, Inc, acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1 , Y1 . 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%. PVA factor for $1 at 4 periods and 10% is 3. 16987. Required: 1. Prepare the joumal entry for American Food Services' purchase of the machine on January 1, Yi

Answer 1

American Food Services should debit the Packaging Machine asset account for $4 million and credit Notes Payable for $4 million on January 1, Y1 to record the purchase of the packaging machine with an installment note.

Step-by-step explanation:

The student is tasked with preparing the journal entry for American Food Services' acquisition of a packaging machine on January 1, Y1, with an installment note. When American Food Services acquires the machine, it must debit an asset account for the value of the machine and credit a liability account for the note payable. The entry would reflect the cost of the $4 million machine and the liability to pay it off in installments with interest at 10% annually over four years.

Since an installment note is involved, American Food Services would record the following journal entry on January 1, Y1:

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Using the given present value factor of 3.16987 for the annuity, which accounts for the time value of money at a 10% interest rate over four periods, the constant annual payment can be determined. However, to record the initial purchase transaction, this factor isn't required as the full amount is financed.