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In: Accounting

American Food Services, Inc., leased a packaging machine from Barton and Barton Corporation. Barton and Barton...

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 $4.5 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 8%.

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.

Solutions

Expert Solution

1 Date Account titles and explanation Debit Credit
2018
Jan 1. Leased equipment 4500000
Lease liability 4500000
(Lease recorded)
2 Minimum lease payment=Fair value of leased equipment/Present value interest annuity factor at implicit rate over the lease term
Minimum lease payment=4500000/Present value interest annuity factor at 8% for 4 years=4500000/3.3121=$ 1358655
Amortization schedule:
Date Minimum
Lease
payment
Interest
expense
Reduction in lease liability Balance
in lease
liability
1 2=Prev.bal in lease liability*8% 3=2-1
Jan 1. 2018 4500000
Dec 31. 2018 1358655 360000 998655 3501345
Dec 31. 2019 1358655 280108 1078547 2422798
Dec 31. 2020 1358655 193824 1164831 1257966
Dec 31. 2021 1358655 100688 1257967 0
* Last year interest expense is adjusted due to difference of $51 (Round-off effect)
3 Date Account titles and explanation Debit Credit
Dec 31. 2018 Interest expense 360000
Lease liability 998655
Cash 1358655
(Lease payment made)
4 Date Account titles and explanation Debit Credit
Dec 31. 2020 Interest expense 193824
Lease liability 1164831
Cash 1358655
(Lease payment made)

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