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 $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.

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.)