60.1K

Verified Solution

Link Copied!

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 $5.7 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 9%. (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 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.

My answers are marked as incorrect. Why?

1. Correct. (below)

January 01, 2021	Right-of-use asset	5,700,000
		Lease payable		5,700,000

2. Incorrect. Why is my amortization schedule not correct? Please explain why. Thanks!

Lease Amortization Schedule
Year	Lease Payments	Effective Interest	Decrease in Balance	Outstanding Balance
				5,700,000 correct
2021	1,465,427 incorrect	513,000 correct	952,427 incorrect	4,747,573 incorrect
2022	1,465,427 incorrect	427,282 incorrect	1,038,145 incorrect	3,709,428 incorrect
2023	1,465,427	333,849 incorrect	1,131,578 incorrect	2,577,850
2024	1,465,427	(1,112,423)	2,577,850	0
Total	5,861,708	161,708	5,700,000

3. Incorrect because of amortization schedule above.

1	December 31, 2021	Lease payable answer correct	952,427answer incorrect
		Interest expense answer correct	513,000selected answer correct
		Cash answer correct		1,465,427 answer incorrect
2	December 31, 2021	Amortization expense answer correct	1,425,000 answer correct
		Right-of-use asset answer correct		1,425,000 answer correct
3	December 31, 2023	Lease payable answer correct	1,131,578 answer incorrect
		Interest expense answer correct	333,849 answer incorrect
		Cash answer correct		1,465,427 answer incorrect
4	December 31, 2023	Amortization expense answer correct	1,425,000 answer correct
		Right-of-use assets answer correct		1,425,000

Answer & Explanation Solved by verified expert

See Answer