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 $40,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $153,238. (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.)

Related Information: Lease term 2 years (8 quarterly periods) Lease renewal option for an additional 3 years (12 quarterly periods) Quarterly lease payments $10,000 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 12%

Explanation / Answer

Note The below calculations is made on Yearly basis for accounting treatment Annual lease Payments for the Year is $10,000*4Quarters =$40,000 Year particulars annual lease payments $ Pv Factor @ 12 % Interest Rate Present Value $ Jan-18 To Dec-18 1st To 4 th instalment        40,000.00 0.8929              35,714.29 Jan-19 To Dec-19 5 Th To 8 th instalment        40,000.00 0.7971              31,884.00 Jan-20 To Dec-20 9 Th To 12 th instalment        40,000.00 0.7117              28,468.00 Jan-21 To Dec-21 13 Th To 16 th instalment        40,000.00 0.6355              25,420.00 Jan-22 To Dec-22 17Th To 20 th instalment        40,000.00 0.5674              22,696.00 total           1,44,182.29 Total asset cost $1,53,238 Total asset cost @ Present Value $1,44,182.29 Accounting Entry Asset Account …………Dr $1,44,182.29 To Lessor Account (Framingham) A/C $1,44,182.29 Note Incase if Natick Industries fail to renual the Lease Aggrement Term they have to pay a panalty of $ 40,000   Accounting Entry Penalty/ Fine A/C . .. . . . Dr $40,000 To Lessor Account (Framingham) A/C $40,000

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