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 $4 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 four years with no residual value. Barton and Barton’s implicit interest rate was 10% (also American Food Services’ incremental borrowing rate).

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Darshita 6.14K March 4, 2020 0 Comments

Required:
Prepare the journal entry for American Food Services at the inception of the lease on January 1, 2016.
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.
Prepare the journal entry for the third lease payment on December 31, 2018.

Darshita Changed status to publish March 4, 2020

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score 0 · Answer 1 · 2020-03-05T05:21:53+00:00

Answer:

January 1, 2016
Leased assets 4,000,000
Lease payable 4,000,000

Present value of an ordinary annuity of $1: n=4, i=10%

=$4,000,000 ÷ 3.16987

= $1,261,881
present lease
value payment

December 31, 2016

Interest expense (10% x outstanding balance) 400,000
Lease payable (difference) 861,881
Cash (payment determined above) 1,261,881

December 31, 2018

Interest expense (10% x outstanding balance) 219,005
Lease payable (difference) 1,042,876
Cash (payment determined above) 1,261,881

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