Federated Fabrications leased a tooling machine on January 1, 2016, for a three-year period ending December 31, 2018. The lease agreement specified annual payments of $32,000 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 $41,000 when its fair value was expected to be $56,000. 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 lessorâs implicit rate of return was 10%, which was less than Federatedâs 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. Calculate the amount Federated should record as a leased asset and lease liability for this capital 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 inception of the lease through the end of the lease term. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
| Federated Fabrications leased a tooling machine on January 1, 2016, for a three-year period ending December 31, 2018. The lease agreement specified annual payments of $32,000 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 $41,000 when its fair value was expected to be $56,000. 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 lessorâs implicit rate of return was 10%, which was less than Federatedâs 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. | Calculate the amount Federated should record as a leased asset and lease liability for this capital 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 inception of the lease through the end of the lease term. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) |
Related questions
Each of the four independent situations below describes acapital lease in which annual lease payments are payable at thebeginning of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1,FVAD of $1 and PVAD of $1) (Use appropriate factor(s) fromthe tables provided.)
| Situation | ||||||||||||||||||
| 1 | 2 | 3 | 4 | |||||||||||||||
| Lease term (years) | 4 | 7 | 5 | 8 | ||||||||||||||
| Lessorâs rate of return | 10 | % | 11 | % | 9 | % | 12 | % | ||||||||||
| Fairvalue of leased asset | $ | 61,000 | $ | 361,000 | $ | 86,000 | $ | 476,000 | ||||||||||
| Lessorâs cost of leased asset | $ | 61,000 | $ | 361,000 | $ | 56,000 | $ | 476,000 | ||||||||||
| Residual value: | ||||||||||||||||||
| Guaranteed by lessee | 0 | $ | 61,000 | 0 | $ | 41,000 | ||||||||||||
| Unguaranteed | 0 | 0 | $ | 18,000 | $ | 26,000 | ||||||||||||
| Determine theannual lease payments for each situation: |
