Question

Federated Fabrications leased a tooling machine on January 1, 2018, for a three-year period ending December 31, 2020. The lease agreement specified annual payments of $43,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2019. The company had the option to purchase the machine on December 30, 2020, for $52,000 when its fair value was expected to be $67,000 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.

Answer 1

1.

Present Value of Annual Lease Payment	43000*2.735537
	=117628
Add: Present Value of Price end of lease	52000*0.751315
	=39068
Present Value of Minimum Lease Payment	117628+39068
	=156696

PV Table:

Year	PV 10%
0	1
1	0.909090909
2	0.826446281
Total	2.73553719
3	0.751314801

2.

	Payments	Interest	Decrease in Balance	Outstanding Balance
			(Payment-Interest)	(Balance of Last period-Decrease in Balance)
				156696
01-Jan-18	43000		43000	113696
31-Dec-18	43000	11370	31630	82066
31-Dec-19	43000	8207	34793	47272
31-Dec-20	52000	4727	47272	0

3.

Date	Account	Debit	Credit
January 1 2018	Lease Equipment-Right ot Use	156696
	Lease Liability		156696
January 1 2018	Lease Liability	43000
	Cash		43000
December 31 2018	Depreciation Exp	26116
	Accumulated Depreciation		26116
	(156696/6)
December 31 2018	Interes Expense	11370
	Lease Liability	31630
	Cash		43000
December 31 2019	Depreciation Exp	26116
	Accumulated Depreciation		26116
	(154740/6)
December 31 2019	Interes Expense	4727
	Lease Liability	47273
	Cash		52000
December 31 2020	Depreciation Exp	26116
	Accumulated Depreciation		26116
	(154740/6)
December 31 2020	Interes Expense	4491
	Lease Liability	47509
	Cash		52000