E 15 2

Finance lease; calculate lease payments

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 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 Bartons implicit interest rate was 10%.

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. Prepare the appropriate entries related to the lease on December 31, 2018.
4. Prepare the appropriate entries related to the lease on December 31, 2020.

Requirement 1 - Journal Entry January 1^st year 1

Requirement 2- Amortization Schedule for the lease. Year Lease Payments Effective Interest Decrease in Balance Outstanding Balance $4,000,000 2018 $1,261,881 .10 (4,000,000) 400,000 861,881 $3,138,119 2021 $1,261,881 .10 (1,147,174) = 114,707 1,147,174 0 $400,000 Requirement 3 - Journal Entry December 31st year 1 Interest Expense (10% X outstanding balance) Lease Payable (Difference) Cash (Payment on the amortization schedule) $861,881 $1,261,881 $1,000,000 Amortization Expense ($4 million / 4 years) Right-of-use Asset $1,000,000 Requirement 4 - Journal Entry December 31st year 3 3