Question

Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $36,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $45,000 when its fair value was expected to be $60,000, 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 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. 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-use asset and lease liability < Required 1 Required 2 >

Answer 1

1. Calculate the amount federated should record as right-of-use asset and lease liability for this finance lease as follows: Year PV @10% Payment $36.000 0.90909 $36.000 0 .82644 $36.000 Present value $36.000 $32.727 $29.752 $98.479 2 Total PVA(10%, 3 years) < $45,000 = 0.75132 $45,000 = $33,809 Right of use asset and liability = $98479 + $33809 = $132,288 Prepare an Amortization Schedule as follows:

Lease Amortization Shedule Effective Interest @10% Decrease in balance Date Payments 01/01/2021 01/01/2021 $36,000 12/31/2021 $36,000 12/31/2022 $36,000 12/31/2023 $45,000 Outstanding Balance $132,288 $96,288 $69,917.00 $40.910.00 $0.00 $36,000 $26,371.00 $29,007 $40.910 $9,629.00 $6,993 $4,090 3. Prepare joumal entries as follows:

Date	Account Titles	Debit	Credit
Jan. 01, 2021	Right of use asset	$132,288
	Lease payable		$132,288
Jan. 01, 2021	Lease Payable	$36,000
	Cash		$36,000
Dec. 31, 2021	Lease Payable	$26,371
	Interest expense	$9,629
	Cash		$36,000
Dec. 31, 2021	Amortization expense	$22,048
	Right of use asset		$22,048
	($132,288 ÷ 6 years)
Dec. 31, 2022	Lease Payable	$29,007
	Interest expense	$6,993
	Cash		$36,000
Dec. 31, 2022	Amortization expense	$22,048
	Right of use asset		$22,048
Dec. 31, 2023	Lease Payable	$40,910
	Interest expense	$4,090
	Cash		$45,000
Dec. 31, 2023	Amortization expense	$22,048
	Right of use asset		$22,048