Natick Industries leased high-tech instruments from Framingham Leasing on Januar

Question

Natick Industries leased high-tech instruments from Framingham Leasing on January 1, 2018. Natick has the option to renew the lease at the end of two years for an additional three years. Natick is subject to a $60,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $400,283. (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:
Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly. There should be 4 entries in total

Related Information: Lease term 3 years (12 quarterly periods) Lease renewal option for an additional 2 years (8 quarterly periods) Quarterly lease payments $24,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. Economic life of asset 5 years Interest rate charged by the lessor 8%

Explanation / Answer

Journal Entry Date Account Title & Explanation Debit Credit 01-Jan-18 Right-of-use equipment $179,382      Lease payable $179,382 01-Jan-18 Lease payable $24,000      Cash $24,000 31-Mar-18 Interest expenses ($179382-24000)*2% $3,107 Lease payable $20,893      Cash $24,000 31-Mar-18 Amortisation expense ($24000-$3107) $20,893      Right-of-use equipment $20,893 Computation of Lease Liability Quaterly Lease rent $24,000 Period 8 Quaterly Interest Rate (8/4) 2% PVAF @2% for 8 7.472 Present Value of Lease $179,328

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