American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. 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 Barton’s implicit interest rate was 8%Required:
1. Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2021.
2. Prepare an amortization schedule for the four-year term of the lease.
3. & 4. Prepare the appropriate entries related to the lease on December 31, 2021 and 2023.

a. Record the lease payment and interest expense for American Food Services (2021)

b. Record the amortization of right-of-use asset for American Food Services (2021)

c. Record the lease payment and interest expense for American Food Services. (2023)

d. Record the amortization of right-of-use asset for American Food Services (2023)

Solution and Explanation:

1) Journal Entry (Amounts in $)

Date  Account Titles  Debit  Credit

Jan 1  Right of Use Asset  4,700,000  

Lease Payable  4,700,000

(To record the lease liability at the beginning of lease)  

2. )Amortization Schedule of Lease (Amounts in $)

Date Beginning     Lease Payment Interest Expense  Decrease Outstanding

               Balance (A)  (B = A*8%)   (C = A*8%)    in Balance      Balance                                                                                                                                                                                                                          

12/31/18  4,700,000  1,419,028  376,000  1,043,028   3,656,972

12/31/19  3,656,972  1,419,028  292,558  1,126,470   2,530,502

12/31/20  2,530,502  1,419,028  202,440  1,216,588    1,313,914

12/31/21  1,313,914      1,419,028  105,114           1,313,914  0

3.) Date  Account Titles and Explanations  Debit  Credit

Dec 31, 2018  Interest Expense              376,000  

Lease Payable                            1,043,028  

Cash                                                      1,419,028

(To record the lease payment and interest exp.)    

Dec 31, 2018  Amortization Expense ($4,700,000/4 yrs)  1,175,000  

Right of Use Asset                                                      1,175,000

(To record amortization of right-of-use asset)    

Dec 31, 2020  Interest Expense  202,440  

Lease Payable              1,216,588  

Cash                                                  1,419,028

(To record the lease payment and interest exp.)    

Dec 31, 2020  Amortization Expense ($4,700,000/4 yrs)  1,175,000  

Right of Use Asset                                                      1,175,000

(To record amprtization of right of use asset)

explanation:

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