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 $40,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $153,238. (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	2 years (8 quarterly periods)
Lease renewal option for an additional	3 years (12 quarterly periods)
Quarterly lease payments	$10,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset	5 years
Interest rate charged by the lessor	12%

Answer 1

S No. Necessary Adjusting Journal Entries Jan 1,2018 70,303 Right-of-use asset(10000* 7.030283) 1 Bank Discount (S90,000 X 10% X 30/360) 70,303 Lease Payable Jan 1,2018 10,000 2 10,000 Cash 3 Jan 1,2018 Interest Expense[3%*(70303-10000)] 1,809 Lease Payable(10000-1809) 8,191 10,000 Cash 4 March 31,2018 Amortization expense 8,191 Right-of-use asset 8,191