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 $4.7 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 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 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.
a.Record the lease payment and interest expense for American Food Services (2018)
b. Record the amortization of right-of-use asset for American Food Services (2018)
c. Record the lease payment and interest expense for American Food Services. (2020)
d. Record the amortization of right-of-use asset for American Food Services (2020)
1) Journal Entry (Amounts in $)
Date | Account Titles | Debit | Credit |
Jan 1 | Right of Use Asset | 4,700,000 | |
Lease Payable | 4,700,000 | ||
(To record the lease liability at the beginning of lease) |
2) Annual lease payment = Lease Payable/PVAF(8%, 4 yrs)
= $4,700,000/3.31212684 = $1,419,028
Amortization Schedule of Lease (Amounts in $)
Date | Beginning Balance (A) | Lease Payment (B = A*8%) | Interest Expense (C = A*8%) | Decrease in Balance (D = B-C) | Outstanding Balance (E = A-D) |
12/31/18 | 4,700,000 | 1,419,028 | 376,000 | 1,043,028 | 3,656,972 |
12/31/19 | 3,656,972 | 1,419,028 | 292,558 | 1,126,470 | 2,530,502 |
12/31/20 | 2,530,502 | 1,419,028 | 202,440 | 1,216,588 | 1,313,914 |
12/31/21 | 1,313,914 | 1,419,028 | 105,114 | 1,313,914 | 0 |
3 & 4) Journal Entries (Amounts in $)
Date | Account Titles and Explanations | Debit | Credit |
Dec 31, 2018 | Interest Expense | 376,000 | |
Lease Payable | 1,043,028 | ||
Cash | 1,419,028 | ||
(To record the lease payment and interest exp.) | |||
Dec 31, 2018 | Amortization Expense ($4,700,000/4 yrs) | 1,175,000 | |
Right of Use Asset | 1,175,000 | ||
(To record amortization of right-of-use asset) | |||
Dec 31, 2020 | Interest Expense | 202,440 | |
Lease Payable | 1,216,588 | ||
Cash | 1,419,028 | ||
(To record the lease payment and interest exp.) | |||
Dec 31, 2020 | Amortization Expense ($4,700,000/4 yrs) | 1,175,000 | |
Right of Use Asset | 1,175,000 | ||
(To record amprtization of right of use asset) |