Question
2. Federated Fabrications leased a tooling machine from Universal Corp. on January 1, 2016, for a three-year period ending December 31, 2018. The lease agreement
2. Federated Fabrications leased a tooling machine from Universal Corp. on January 1, 2016, for a three-year period ending December 31, 2018. The lease agreement specified annual payments of $35,000 beginning with the first payment at the inception of the lease, and each December 31 through 2017. The company had the option to purchase the machine on December 30, 2018, for $44,000 when its fair value was expected to be $59,000. The machine's estimated useful life was six years with no salvage value. Federated depreciates assets by the straight-line method. The company was aware that the lessors implicit rate of return was 10%, which was less than Federateds incremental borrowing rate. 1). Show how Universal Corp. calculated the $35,000 annual lease payments. 2). Calculate the amount Federated should record as a leased asset and lease liability for this capital lease 3). Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 4) Prepare the appropriate entries for Federated from the inception of the lease through the end of the lease term.
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