Question

Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 10%. (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. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare the appropriate entries for Federated from the beginning of the lease through the end of the lease term. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. (Round your intermediate and final answers to the nearest whole dollar amount. Enter all amounts as positive values.) Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 Total Lease Amortization Schedule Payments Effective Decrease in Outstanding Interest Balance Balance $ 125,359 $ 32,000 $ 0 $ 32,000 93,3591 32,000 8,634 23,3661 69,993 32,000 6,297 25,703 44,290 41,000 (3,290) $ 137,000 Required 1 Required 3 >

Answer 1

Answer I. Calculate the amount Federated Should record as a right of use asset and lease liability for this finance lease : Annual Lease rental = $32000 Lease term = 3 years purchase option = $41000 Fair value = $ 56000 Estimated useful = six years life in years Lessor's Implicit rate = 18% of return - present value of Minimum lease payment (A) Present Value of = $32000 X present Value factor lease rental = $32000 x 2.73553719 187540 = $ (B) present Value of = $ 41000 X 0.75131480 purchase obtion = $ 30800 Present value of lease = $ (87540 + 30800) payments (A+B) $118340 So, Rignt of use Asset = $118340 Lease liability = $118340