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, 2018. The lease agreement for the $4.7 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 8%. (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.

a.Record the lease payment and interest expense for American Food Services (2018)

b. Record the amortization of right-of-use asset for American Food Services (2018)

c. Record the lease payment and interest expense for American Food Services. (2020)

d. Record the amortization of right-of-use asset for American Food Services (2020)

Explanation / Answer

1) Journal Entry (Amounts in $)

2) Annual lease payment = Lease Payable/PVAF(8%, 4 yrs)

= $4,700,000/3.31212684 = $1,419,028   

Amortization Schedule of Lease (Amounts in $)

3 & 4) Journal Entries (Amounts in $)

Date Account Titles Debit Credit Jan 1 Right of Use Asset 4,700,000 Lease Payable 4,700,000 (To record the lease liability at the beginning of lease)

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