Question

On January 1, 2018, Taco King leased retail space from Fogelman Properties. The 10-year finance lease...

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 $440,000. 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 $670,000. 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 $680,000. Amortization is recorded quarterly.

Homework Answers

Answer #1
1)
Date Particulars Debit ($) Credit ($)
Jan 1, 2018 Right of use asset (440000*3%)*33.16303 437752
Lease payable ($13,800*33.33) 437752
(To record the inception of lease payable)
Jan 1, 2018 Lease payable 13200
Cash (440000*3%) 13200
(To record the lease payment)
** Form PVAD table 1%, 40 months = 33.16303
2)
Date Particulars Debit ($) Credit ($)
April 1, 2018 Interest expense (1%*(437752-13200)) 4246
Variable lease expense (680000-440000)*3% 7200
Lease payable (difference) 8954
Cash (680000*3%) 20400
(To record the lease payment)
April 1, 2018 Amortization expense (437752/40 months) 10944
Right of use asset 10944
(To record the amortization expense.)
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