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    Leased Asset, Liability, and Amortization Schedule

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    Federated fabrications leased a tooling machine on January 1, 2011, for a three-year period ending December 31, 2013. The lease agreement specified annual payment of $36,000 beginning with the first payment at the inception of the lease, and each December 31 through 2012. The company had the option to purchase the machine on December 30, 2013, for $45,000 when its fair value was expected to be $60,000. 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 lessor's implicit rate of return was 12%, which was less than Federated's incremental borrowing rate.

    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 terms

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    Solution Preview

    Hello,

    Please find the solution attached for proper formatting.

    1.
    PV of $1, n = 3, and i = 12% = 0.71178
    PVannuity Due, n = 3, & i =12% = 2.69005

    PV of annual Lease Payments ($36,000 × 2.69005) $96,842
    Add: PV of the BPO Price ($45,000 × 0.71178) $32,030
    PV of minimum Lease Payments $128,872

    2.
    Lease Amortization Schedule
    Payments Effective Interest
    (12% of Outstanding ...

    Solution Summary

    Leased assets, liability, and amortization schedules are examined. The amount federated should record as a leased asset and lease liability for this capital lease is determined.

    $2.19

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