Question

Natick Industries leased high-tech instruments from Framingham Leasing on January 1, 2018. Natick has the option to renew the lease at the end of two years for an additional three years. Natick is subject to a $50,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $200.142. (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.) Related Information: Lease term Lease renewal option for an additional Quarterly lease payments Economic life of asset Interest rate charged by the lessor 2 years (8 quarterly periods) 3 years (12 quarterly periods) $12,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. 5 years Required: Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Record the beginning of the lease for Natick Ind.

• Record the lease payment for Natick industries.
• Record the lease and interest payment for Natick industries.
• Record the amortization of right-to-use asset for Natick Industries.

Answer 1

Natick Industries Finance/Sales-Type PV of lease pmts: Lease pmts. factor (for pv annuity due; n=20, i=2%) 12,000 16.67846 2,00,142 The lease term will be five years. The lease term for both the lessee and the lessor is the contractual lease term modified by any renewal or termination options for which exercise of the options is reasonably certain. The $50,000 penalty for failure to exercise the three-year renewal option implies that it is reasonably certain the original lease term will be extended to five years (20 quarters). Payment Date Lease Payments Interest Expense Decrease in Balance Lease Balance 2.00% = 1 01-01-2018 31-03-2018 30-06-2018 30-09-2018 31-12-2018 31-03-2019 30-06-2019 30-09-2019 31-12-2019 31-03-2020 30-06-2020 30-09-2020 31-12-2020 31-03-2021 30-06-2021 30-09-2021 31-12-2021. 31-03-2022 30-06-2022 30-09-2022 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000|| 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000|| 12,000 12,000 3,763 3,598| 3,430 3,259 3,084 2,905 2,724 2,538 2,349 2,156 1,959 1,758 1,553 1,344 1,131 12,000 8,237 8,402 8,570 8,741 8,916 9,095 9,276 9,462 9,651 9,844 10,041 10,242 10,447 10,656 10,869 11,086 11,308 11,534 11,765 2,00,142 $1,88,142 $1,79,904 $1,71,502 $1,62,932 $1,54,191 $1,45,275 $1,36,180 $1,26,904 $1,17,442 $1,07,791 $97,947 $87,906 $77,664 $67,217 $56,561 $45,693 $34,607 $23,299 $11,765 (0) 914 692 466 235 = Total 2,40,000 39,858 | 2,00,142 Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly. Date General Journal 01-Jan-18 Right-of-use asset Lease payable Debit Credit 2,00,142 2,00,142 12,000 01-Jan-18 Lease payable Cash 12,000 31-Mar-18 Interest expense Lease payable Cash 3,763 8,237 12,000 10,007 31-Mar-18 Amortization expense Right-of-use asset 10,007