Exercise 15-7 Capital lease [LO15-5]

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 $4.7 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 Bartons implicit interest rate was 8% (also American Food Services incremental borrowing rate). (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 inception of the lease on January 1, 2016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.

2.

Prepare an amortization schedule for the four-year term of the lease.

Lease Amortization Schedule
Year	Lease Payments	Effective Interest	Decrease in Balance	Outstanding Balance
				4,700,000
2016	1,177,145	376,000	801,145	3,898,855
2017	1,177,145	311,908	865,237	3,033,618
2018	1,177,145	242,689	934,456	2,099,162
2019	1,177,145	-922,017	2,099,162	0
Totals	4,708,580	8,580	4,700,000

3.

Prepare the journal entry for the first lease payment on December 31, 2016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

4.	Prepare the journal entry for the third lease payment on December 31, 2018. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)