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, 2018. The lease agreement for the $4.1 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 10% (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, 2018. 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, 2018 and 2020.

Answer 1

Account Titles and Explanation Debit Credit Answer 1 Date January, 1 2018 Right use of Assets $4,100,000 Lease Payable $4,100,000 (To record the lease liability at the beginning of lease) Lease Amortization Schedule 2 Effective Decrease in Outstanding Lease Payments Interest Balance Balance Year $4,100,000 Jan. 1, 2018 $1,293,430 $410,000 12/31/2018 $883,430 $3,216,570 $1,293,430 $321,657 12/31/2019 $971,773 $2,244,797 12/31/2020 $1,293,430 $224,480$1,068,950$1,175,846 $1,293,430 $117,584$1,175,846 12/31/2021 ($0) Calculation of Lease Payment PVAF [1- (1r)^-n] /r PVAF [1- (1+0.10)^-4]/ 0.10 PVAF 3.16986545 Lease Payment $4,100,000 Lease Value (A) PVAF (B) Lease Payment [(A)/ (B)] 3.16986545 $1,293,430

Account Titles and Explanation Debit Credit 3 & 4 Date Dec. 31, 2018 $410,000 Interest Expense Lease Payable $883,430 $1,293,430 Cash (To record the lease payment and interest expense) Date Account Titles and Explanation Debit Credit Dec. 31, 2018 Amortization Expense ($4,100,000 / 4 years) $1,025,000 $1,025,000 Right of Use ASsets (To record the amortization of right of use assets) Account Titles and Explanation Debit Date Credit Interest Expense Lease Payable Dec. 31, 2020 $224,480 $1,068,950 $1,293,430 Cash (To record the lease payment and interest expense) Account Titles and Explanation Date Debit Credit Amortization Expense ($4,100,000 /4 years) Right of Use Assets Dec. 31, 2020 $1,025,000 $1,025,000 (To record the amortization of right of use assets)