Question

American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. The lease agreement for the $5.5 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be five years with no residual value. Barton and Barton's implicit interest rate was 11% (V of $1. PV of $1, FVA of $1, PVA of $1. FVAD of $1 and PVAD of SD) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2021 2. Prepare an amortization schedule for the four year term of the lease 3.& 4. Prepare the appropriate entries related to the lease on December 31, 2021 and 2023 Complete this question by entering your answers in the tabs below.

Answer 1

1)

Date	Account title	Debit	credit
Jan 1,2021	Right of use asset-Machinery	5,500,000
	Lease liability		5,500,000

2)

AMORTIZATION SCHEDULE
DATE	Lease payment [A]	Interest expense [B]	Principal payment [A-B]	Liability at end
1/1/2021				5500000
31/12/2021	1772792	5500000*11%= 605000	1167792	5500000-1167792= 4332208
31/12/2022	1772792	4332208*11%= 476543	1296249	4332208-1296249 =3035959
31/12/2023	1772792	3035959*11%= 333955	1438837	3035959-1438837= 1597122
31/12/2024	1772792	175670	1597122	.0

**Interest expense for year 2024 is adjusted for due to rounding off.

Annual payment = Lease liability /PVA11%,4

                   = 5500000/3.10245

                 = 1772792

3& 4)

Date	Account title	Debit	credit
31Dec 2021	Interest expense	605000
	Lease liability	1167792
	cash		1772792
31 Dec 2021	Depreciation expense	1375000
	Accumulated depreciation /Right of use asset-Machinery		1375000
31Dec 2023	Interest expense	333955
	Lease liability	1438837
	cash		1772792
31 Dec 2021	Depreciation expense	1375000
	Accumulated depreciation /Right of use asset-Machinery		1375000

Depreciation expense : Cost /lease legal life

                               = 5500000/4

                              = 1375000