Question

Federated Fabrications leased a tooling machine on January 1, 2018, for a three-year period ending December 31, 2020. The lease agreement specified annual payments of $38,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2019. The company had the option to purchase the machine on December 30, 2020, for $47,000 when its fair value was expected to be $62,000 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 20%. (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 Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease. (Round your intermediate and final answer to the nearest whole dollar amount.) Right of une asset and lease liability Required 2 >

Answer 1

1 Particulars Present value of annual lease payments Add: Present value of the exercise price Present value of lease payments Amount $ 96,026.00 =38000*2.527 $ 27,213.00 -47000*0.579 $ 1,23,239.00 Effective interest 20% Decrease in balance 2 Date Payments 01-01-2018 $ 12/31/18 $ 12/31/19 $ 12/31/20 $ 38,000.00 38,000.00 $ 38,000.00 $ 47,000.00 $ Outstanding balance $1,23,239.00 $ 85,239.00 $ 64,286.80 $ 39,144.16 $ $ 38,000.00 $ 20,952.20 $ 25,142.64 $ 39,144.16 17,047.80 12,857.36 7,855.84 CR DR $ 1,23,239.00 3 Date Particulars 01-01-2018 Right of use asset Lease payable To record the lease payment $1,23,239.00 $ 38,000.00 01-01-2018 Lease payable Cash (annual payments) To record the lease payment $ 38,000.00 $ 20,539.83 31-12-2018 Amortization expense Right to use asset To record the amortization expense =123239/6 $ 20,539.83 $ $ 17,047.80 20,952.20 31-12-2018 Interest expense Lease payable Cash To record the lease payment $ 38,000.00 $ 20,539.83 =123239/6 31-12-2019 Amortization expense Right of use asset To record the amortization expense $ 20,539.83 $ $ 12,857.36 25,142.64 31-12-2019 Interest expense Lease payable Cash To record the lease payment $ 38,000.00 $ 20,539.83 =123239/6 31-12-2020 Amortization expense Right of use asset To record the amortization expense $ 20,539.83 $ $ 7,855.84 39,144.16 31-12-2020 Interest expense Lease payable Cash To record the lease payment $ 47,000.00