Question

On January 1, 2018, Taco King leased retail space from Fogelman Properties. The 10-year finance lease requires quarterly variable lease payments equal to 3% of Taco King’s sales revenue, with a quarterly sales minimum of $460,000. 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 $680,000. Fogelman’s interest rate, known by Taco King, was 4%. (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, 2018. 2. Prepare the journal entries for Taco King at April 1, 2018. First quarter sales were $690,000. Amortization is recorded quarterly.

Answer 1

Solution:
1.) Prepare the journal entries for Taco King to record the lease at its beginning:
It given that taco king required to make quarterly payments based on sales revenue of $460,000 lease payments are $13,800 ($460,000*3%) and are the basis for measurement of the right of use asset and lessee's lease liability.

Date	Particulars	Debit ($)	Credit ($)
Jan 1 2018	Right of use asset	$459,954
	Lease payable ($13,800*33.33)		$459,954
	(To record the inception of lease payable)
Jan 1 2018	Lease payable	$13,800
	Cash (460,000*3%)		$13,800
	(To record the lease payment)

2.) Prepare the Journal entries for Taco King at April 1 2018

Date	Particulars	Debit ($)	Credit ($)
April 1 2018	Interest expense (1%*($459,954-$13,800))	$4,462
	Variable lease expense ($690,000-460,000)*3%	$6,900
	Lease payable (difference)	$9,338
	Cash ($690,000*3%)		$20,700
	(To record the lease payment)
April 1 2018	Amortization expense ($459,954/40 months)	$11,499
	Right of use asset		$11,499
	(To record the amortization expense.)