Question

On January 1, 2021, Taco King leased retail space from Fogelman Properties. The 10-year finance lease requires quarterly variable lease payments equal to 2% of Taco King’s sales revenue, with a quarterly sales minimum of $490,000. Payments at the beginning of each quarter are based on previous quarter sales. During the previous 5-year period, Taco King has generated quarterly sales of over $695,000. Fogelman’s interest rate, known by Taco King, was 8%. (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. Prepare the journal entries for Taco King at the beginning of the lease at January 1, 2021.
2. Prepare the journal entries for Taco King at April 1, 2021. First quarter sales were $705,000. Amortization is recorded quarterly.

Answer 1

1) Preparation of the journal entries for Taco King at the beginning of the lease at January 1, 2021.

Date	Accounts Title	Debit($)	Credit($)
Jan 1,2021	Right of use of Assets	$268,084
	Lease Payable(Note 1 )		$268,084
	(Recording of the right to use the Asset)
Jan 1,2021	Lease Payable (490,000*2%)	$9800
	Cash		$9800
	(Recording of lease payment)

Note 1: Calculation of Present value of Lease payable

Given in the question that 10-year finance lease requires quarterly variable lease payments equal to 2%

Guven that Rate is 8% and so Rate will be = (8/4)= 2% and time period will be (10years*4)= 40

PV of Lease = (Sales Revenue * Variabel leae paymnet)*PVAF(r,n) (where r = rate and n =time period)

=(490,000*2%)*PVAF(2%,40 )

= ($9,800 *27.3555) = $268,084

2)Preparation the journal entries for Taco King at April 1, 2021.

Date	Accounts Title	Debit($)	Credit($)
April 1,2021	Interest Expense(Note 2)	5166
	Variable lease expense(Note 3)	4100
	Lease Payable	4634
	Cash(695,000*2%)		13,900
April 1 2021	Amortization Expenses(Note 4)	6702
	Right of use Assets		6702

Note 2:Calculation of interest expense= (268084-9800)*2%= $5166

Note 3:Variable lease expense=(695,000- 490,000)*2%= 4100

Note 4:Amortization Expenses= (268,084/40)= $6702

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