In: Accounting
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 $4.5 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Barton’s implicit interest rate was 8%.
1. Prepare the journal entry for American Food
Services at the beginning of the lease on January 1, 2018.
2. Prepare an amortization schedule for the
four-year term of the lease.
3. & 4. Prepare the appropriate entries
related to the lease on December 31, 2018 and 2020.
1 | Date | Account titles and explanation | Debit | Credit | |||||
2018 | |||||||||
Jan 1. | Leased equipment | 4500000 | |||||||
Lease liability | 4500000 | ||||||||
(Lease recorded) | |||||||||
2 | Minimum lease payment=Fair value of leased equipment/Present value interest annuity factor at implicit rate over the lease term | ||||||||
Minimum lease payment=4500000/Present value interest annuity factor at 8% for 4 years=4500000/3.3121=$ 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) | |||||||||