Answer:
TODAY value of the future obligation ($4,000,000 payable in 4 years’ time, at 10% interest rate)
Present Value = Future Value / (1+r)^4 = 4000000/(1+0.1)^4 = 2,732,053.82
Explanation:
Calculations
TODAY value of the future obligation ($4,000,000 payable in 4 years’ time, at 10% interest rate)
Present Value = Future Value / (1+r)^4 = 4000000/(1+0.1)^4 = 2,732,053.82
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2021.
Dr. Machinery 2,732,053.82
Cr. Future Obligation 2,732,053.82
Being Purchase of Machine for deferred payment of $4m in 4 years @ 10%
2. Prepare an amortization schedule for the four-year term of the installment note.
<u>AMORTIZATION TABLE</u>
<u>Year</u> <u>Future Obligation</u> <u>Unwinding of Interest</u> <u>Balance</u>
1. 2,732,053.82 273,205.38 3,005,259.2
2. 3,005,259.2 300,525.92 3,305,785.12
3. 3,305,785.12 330,578.51 3,636,363.63
4. 3,636,363.63 363,636.36 4,000,000.00
3. Prepare the journal entry for the first installment payment on December 31, 2021.
At the end of 2021, the obligation will increase because we are one year closer to having to pay the $4,000,000
The amount by which it increases is the unwinding of the interest
10% x 2,732,053.82 = 273,205.38 and the double entry to record that increase is:
Dr Finance charges.......273,205.38
Cr Obligation account.........................273,205.38
Being the unwinding of 10% interest on deferred finance obligation on machinery for the year.
4. Prepare the journal entry for the third installment payment on December 31, 2023.
10% x 3,305,785.12 = 330,578.51 and the double entry to record that increase is:
Dr Finance charges.......330,578.51
Cr Obligation account.........................330,578.51
Being the unwinding of 10% interest on deferred finance obligation on machinery for the year.
