Question

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 $5.1 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 five years with no residual value. Barton and Barton’s implicit interest rate was 11%. (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 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.

Answer 1

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Working-1
				0
Lease Contract	A	$        5,100,000		1	0.900901
PVAF (11%,n=4 Years)	B	3.1024		2	0.811622
				3	0.731191
Annaul Lease Payment	A/B	$        1,643,864		4	0.658731
					3.102446
Part -1	Jouranal Entry
Date	Account	Debit	Credit
Jan 1 2018	Right to use Assets	$        5,100,000
Jan 1 2018	Lease Liability		$       5,100,000
Part -2	Amortization Schedule
Year	Annual Lease Payment	Interest 11%	Principal	Balance
		Balance*11%	Payment-Int	Bal-Principal
Jan 1 2018				$       5,100,000
Dec 31 2018	$                                 1,643,864	$           561,000	$       1,082,864	$       4,017,136
Dec 31 2019	$                                 1,643,864	$           441,885	$       1,201,979	$       2,815,156
Dec 31 2020	$                                 1,643,864	$           309,667	$       1,334,197	$       1,480,959
Dec 31 2021	$                                 1,643,864	$           162,905	$       1,480,959	$                       -
Part -3 & 4
Date	Account	Debit	Credit
Dec 31 2018	Lease Liability	$        1,082,864
Dec 31 2018	Interest Expenses	$           561,000
Dec 31 2018	Cash		$       1,643,864
Dec 31 2018	Depreciation Expense	$        1,275,000
Dec 31 2018	Accumulated Depreciation		$       1,275,000
Dec 31 2020	Lease Liability	$        1,334,197
Dec 31 2020	Interest Expenses	$           309,667
Dec 31 2020	Cash		$       1,643,864
Dec 31 2018	Depreciation Expense	$        1,275,000
Dec 31 2018	Accumulated Depreciation		$       1,275,000