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 $5.1 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 five years with no residual value. Barton and Barton’s implicit interest rate was 11%. (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) Prepration of journal entry
Particulars			Debit	Credit
Lease Assets a/c Dr			5100000
To    lease Payable				5100000
2) PVIFA FOR 4 PAYMENT @ 11%
5100000/3.10245 = 1643862
Date	Payment	intt @11%	principal	balance
01-01-2018				5100000
31-12-2018	1643862	**561000	1082862	4017138
31-12-2019	1643862	**441885	1201977	2815161
31-12-2020	1643862	**309668	1334194	1480967
31-12-2021	1643862	**162896	1480967
	6575448	1475448	5100000
3) preparation of the appropriate entries related to the lease
	Particulars		Debit	Credit
31-12-2018	interest exp		561000
	lease payable		1082862
	cash			1643862
31-12-2020	interest exp		309668
	lease payable		1334194
	cash			1643862
Beginning balance*intt rate
**   2018	5100000*11% = 561000
2019	4017138*11%= 441885
2020	2815161*11%= 309668
2021	1480967*11%=162906