Question

Natick Industries leased high-tech instruments from Framingham Leasing on January 1, 2021. Natick has the option to renew the lease at the end of two years for an additional three years. Natick is subject to a $55,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $346,294. (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.) Related Information: Lease term 2 years (8 quarterly periods) Lease renewal option for an additional 3 years (12 quarterly periods) Quarterly lease payments $19,000 at Jan. 1, 2021, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. Economic life of asset 5 years Interest rate charged by the lessor 4% Required: Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2021. Appropriate adjusting entries are made quarterly. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations and final answers to the nearest whole dollar.)

Answer #1

Date |
Account title |
Debit($) |
Credit($) |

1) | Right of use asset (19000*18.226) | 346294 | |

Lease payable | 346294 | ||

(for right to use asset) | |||

2) | Lease payable | 19000 | |

To Cash | 19000 | ||

(Payment of lease recorded) | |||

3) | Interest expenses | 3273 | |

Lease payable | 15727 | ||

Cash | 19000 | ||

(payment of interest and lease) | |||

4) | Amortization expenses | 17315 | |

Right to use assets | 17315 | ||

(amortization expenses recorded) |

Working notes:

Calculation of interest expenses:

[1% of ($ 346294 - 19000)]=$ 3273

Why to take 1%? Because Interest is payable 4 times in the given financial year @ 4% p.a. Then for one time interest rate will be 4%÷4 which means 1%

Calculation of amortization expenses :

$346294÷20 that come $17315

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