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 $4.2 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 four years with no residual value. Barton and Barton's implicit interest rate was 9%. (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. 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.

Answer 1

Required 1 :
Date	General journal	Debit	Credit
Jan 1 ,2021	Right use of asset	$ 4,200,000
	Lease payable		$ 4,200,000
	(to record the lease liability at the beginning of lease )

Required 2 :
Date	Beginning Balance (A)	Lease payment (B)	Interest expense   ( C= A *9% )	Decrease in Balance (D = B -C )	Outstanding Balance (E = A- D )
12/31/2021	$ 4,200,000	$ 1,296,408 ( note 1 )	$ 378,000          {$4,200,000*9% }	$ 918,408        {$1,296,408 - $378,000}	$ 3,281,592 {$4,200,000 - $ 918,408 }
12/31/2022	$ 3,281,592	$ 1,296,408 ( note 1 )	$ 295,343          {$3,281,592 *9% }	$ 1,001,065    {$1,296,408 - $295,343 }	$ 2,280,527 {$ 3,281,592 - $ 1,001,065 }
12/31/2023	$ 2,280,527	$ 1,296,408 ( note 1 )	$ 205,247          {$2,280,527 *9% }	$ 1,091,161    {$1,296,408 - $205,247 }	$ 1,189,366 {$ 2,280,527 - $ 1,091,161 }
12/31/2024	$ 1,189,366	$ 1,296,408 ( note 1 )	$ 107,042          {$1,189,366 *9% }	$ 1,189,366    {$1,296,408 - $107,042 }	$ 0

Note 1 :
To calculate the lease payment :
lease payment = lease value / PVAF
lease payment = $ 4,200,000 / 3.23972
lease payment = $ 1,296,408
present value of an annuity factor (PVAF) of $ 1 , n= 4 and rate (i)= 9 is 3.23972

Required 3 :
Date	General journal	Debit	Credit
Dec 31,2021	Interest Expense   {$4,200,000*9% }	$ 378,000
	Lease payable {$1,296,408 - $378,000}	$ 918,408
	Cash		$ 1,296,408
	(To record lease payment and interest expense )
Dec 31,2021	Amortization expense {$ 4,200,000 / 4 years }	$ 1,050,000
	Right of use Asset		$ 1,050,000
	( To record amortization of right of use asset )
Required 4 :
Date	General journal	Debit	Credit
Dec 31,2023	Interest Expense   {$2,280,527 *9% }	$ 205,247
	Lease payable {$1,296,408 - $205,247 }	$ 1,091,161
	Cash		$ 1,296,408
	(To record lease payment and interest expense )
Dec 31,2023	Amortization expense {$ 4,200,000 / 4 years }	$ 1,050,000
	Right of use Asset		$ 1,050,000
	( To record amortization of right of use asset )