American Food Services, Inc., leased a packaging machine from Barton and Barton

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, 2016. The lease agreement for the $5.6 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 six years with no residual value. Barton and Barton’s implicit interest rate was 10% (also American Food Services’ incremental borrowing rate). (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.)

Prepare the journal entry for American Food Services at the inception of the lease on January 1, 2016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Prepare an amortization schedule for the four-year term of the lease.

Prepare the journal entry for the first lease payment on December 31, 2016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Prepare the journal entry for the third lease payment on December 31, 2018. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Explanation / Answer

Solution:

(A).

Lease Asset A/c 5,60,000

Lease Payables 5,60,000

(B).

Amortization 10% MLP Table Value:

Value = 10% = 3.16987 ©Dr

Asset Value = 5,60,000 / 3.16987

   = 1,76,663.39

   Amortization Value = 1,76,663

(C).

   Interest Expencess 56,000

Lease Payable 5,60,000

   Cash 6,16,000

(D).

Interest Expencess A/c

Lease Payables A/c

   Cash A/c

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