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 $4.8 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 six years with no residual value. Barton and Barton’s implicit interest rate was 9%. (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

1

Prepare the journal entry for American Food Services at the inception of the lease on January 1, 2018

Date	Description	Debit $	Credit $
Jan-1-18	Leased asset	4,800,000
	Lease payable		4,800,000

___________________________________________-

2

Prepare an amortization schedule for the four-year term of the lease.

Computation of MLP:

PVIFA for 4 payments at 9% =

=$4,800,000 ÷ 3.23972

= $1,481,610

schedule for the four-year term of the lease.

Date	Payment	Interest at 10%	Principal	Balance
1/1/2018				4,800,000
12/31/2018	1481610	432000	1049610	3,750,390
12/31/2019	1481610	337535.1	1144074	2,606,316
12/31/2020	1481610	234568.4	1247041	1,359,275
12/31/2021	1481610	122334.8	1359275	0

__________________________________________________

3

Prepare the appropriate entries related to the lease on December 31, 2018 and 2020.

Date	Description	Debit $	Credit $
12/31/2018	Interest expense	432000
	Lease payable	1049610
	Cash		1481610
12/31/2020	Interest expense	234568
	Lease payable	1247041
	Cash		1481610