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 $31,000 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 $40,000 when its fair value was expected to be $55,000 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 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. 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

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1. Right of Use of asset and Lease Liability
Year	PV at 11%	Payment	Present Value
0	1	31000	31,000
1	0.900900901	31000	27,928
2	0.811622433	31000	25,160
3	0.731191381	40000	29,248
	Present Value of Lease		1,13,336
Right of Use of asset and Lease Liability	$ 113336
2. Amortization Schedule
	Payment	Interest	Lease	Balance
0				113336
0	31000		31000	82336
1	31000	9057	21943	60393
2	31000	6643	24357	36036
3	40000	3964	36036	0
3. Journal Entries
Date	Account	Debit	Credit
January 1 2018	Lease Equipment	113336
	Lease Liability		113336
January 1 2018	Lease Liability	31000
	Cash		31000
December 31 2018	Depreciation Expense (113336/6)	18889
	Accumulated Depreciation		18889
December 31 2018	Interest Expense	9057
	Lease Liability	21943
	Cash		31000
December 31 2019	Depreciation Expense (113336/6)	18889
	Accumulated Depreciation		18889
December 31 2019	Interest Expense	6643
	Lease Liability	24357
	Cash		31000
December 31 2020	Depreciation Expense (113336/6)	18889
	Accumulated Depreciation		18889
December 31 2020	Interest Expense	3964
	Lease Liability	36036
	Cash		40000