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 $45,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $321,800. (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	$21,000 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%

Required:
Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Answer 1

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	Present Value of Lease Payments
	Quarterly Lease payments		$    21,000
	PV of annuity of $1, n=20, i=3%		15.32380
	Present value of Lease payments		$ 321,800
Date	Account	Debit	Credit
Jan 1 2018	Right of use asset	$   321,800
	Lease Payable		$ 321,800
	(To record lease by lessee)
Jan 1 2018	Lease Payable	$     21,000
	Cash		$    21,000
	(To record first payment)
Mar 31 2018	Interest Expense [3%*($321,800-$21,000)]	$        9,024
	Lease Payable (Plug in)	$     11,976
	Cash		$    21,000
	(To record second payment)
Mar 31 2018	Amortization Expense ($321,800/20 Q)	$     16,090
	Right of use asset		$    16,090
	(To record amortization expense)