Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessors implicit rate of return was 10%. (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. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease.

2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term.

3. Prepare the appropriate entries for Federated from the beginning of the lease through the end of the lease term.

1 118,340 January 01, 2021 Right-of-use asset Lease payable 118,340 2 32,000 January 01, 2021 Lease payable Cash OO 32,000 3 December 31, 202 Lease payable X 23,366 X Interest expense x 8,634 X Cash X 32,000 X 4 X 19,724 X December 31, 202 Amortization expense Right-of-use asset x 19,724 X 5 X December 31, 202. Lease payable Interest expense 25,703 X 6,297 x X Cash X 32,000 X 6 x 19,723 X December 31, 202 Depreciation expense Accumulated depreciation X 19,723 7 December 31, 202 Lease payable x 37,371 X 3,729 X Interest expense X Cash X 41,000 X 8 X 19,723 X December 31, 202 Amortization expense Right-of-use asset X 19,722 1 118,340 January 01, 2021 Right-of-use asset Lease payable 118,340 2 32,000 January 01, 2021 Lease payable Cash OO 32,000 3 December 31, 202 Lease payable X 23,366 X Interest expense x 8,634 X Cash X 32,000 X 4 X 19,724 X December 31, 202 Amortization expense Right-of-use asset x 19,724 X 5 X December 31, 202. Lease payable Interest expense 25,703 X 6,297 x X Cash X 32,000 X 6 x 19,723 X December 31, 202 Depreciation expense Accumulated depreciation X 19,723 7 December 31, 202 Lease payable x 37,371 X 3,729 X Interest expense X Cash X 41,000 X 8 X 19,723 X December 31, 202 Amortization expense Right-of-use asset X 19,722