Natick Industries leased high-tech instruments from Framingham Leasing on Januar

Question

Natick Industries leased high-tech instruments from Framingham Leasing on January 1, 2018. Natick has the option to renew the lease at the end of two years for an additional three years. Natick is subject to a $50,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $200,142. (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:
Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2018. Appropriate adjusting entries are made quarterly.

a. Record the beginning of the lease for Natick Industries. (Jan 1)

b. Record the lease payment for Natick industries. (Jan 1)

c. Record the lease and interest payment for Natick industries (Marc 31)

d. Record the amortization of right-to-use asset for Natick Industries. (March 31)

Related Information: Lease term 3 years (12 quarterly periods) Lease renewal option for an additional 2 years (8 quarterly periods) Quarterly lease payments $12,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. Economic life of asset 5 years Interest rate charged by the lessor 8%

Explanation / Answer

Journal entries :

Explanation :

Present value of lease payments : ( $12000 * 7.47199*) = $89664

* present value of an annuity due of $1 ; n=12 , i=2%

[i=2% ( 8% / 4)] because the lease calls fr quarterly payments.

Interest expense = [ 2% * (89664 - 12000)] = $1553

Amortisation expense ($12000 - 1553) = $10447

Date General journal Debit Credit January 1,2018 Right-of-use equipment 89664      Lease payable 89664 January 1,2018 Lease payable 12000      Cash 12000 March 31 , 2018 Interest expenses 1553 Lease payable 10447      Cash 12000 March 1, 2018 Amortisation expense 10447      Right-of-use equipment 10477

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