Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) ### Lease Amortization ScheduleThe table below outlines the amortization schedule for Federated, detailing the pattern of interest expense over the lease term. All monetary amounts are rounded to the nearest whole dollar and presented as positive values.#### Table: Lease Amortization Schedule| Date | Payments | Effective Interest | Decrease in Balance | Outstanding Balance ||------------|----------|--------------------|---------------------|---------------------|| 01/01/2021 | $32,000 | $0 | $32,000 | || 12/31/2021 | $32,000 | $8,634 | $23,366 | || 12/31/2022 | $32,000 | $6,297 | $25,703 | ($25,703) || 12/31/2023 | $41,000 | | | || **Total** | **$137,000** | | | |### Explanations:- **Payments**: Indicate the scheduled payment made each period. - **Effective Interest**: Represents the interest charged on the outstanding balance for that period.- **Decrease in Balance**: Shows how much of the payment is reducing the lease liability. - **Outstanding Balance**: Reflects the remaining balance after the decrease in balance is applied.Please note that the final outstanding balance is adjusted to zero at the end of the lease term, signaling the lease is fully paid.

Amortization: Paying off debt with installments, where the installments can be either a series of…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $32,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $41,000 when its fair value was expected to be $56,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor’s implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

### Lease Amortization Schedule

The table below outlines the amortization schedule for Federated, detailing the pattern of interest expense over the lease term. All monetary amounts are rounded to the nearest whole dollar and presented as positive values.

#### Table: Lease Amortization Schedule

| Date | Payments | Effective Interest | Decrease in Balance | Outstanding Balance |
|------------|----------|--------------------|---------------------|---------------------|
| 01/01/2021 | $32,000 | $0 | $32,000 | |
| 12/31/2021 | $32,000 | $8,634 | $23,366 | |
| 12/31/2022 | $32,000 | $6,297 | $25,703 | ($25,703) |
| 12/31/2023 | $41,000 | | | |
| **Total** | **$137,000** | | | |

### Explanations:

- **Payments**: Indicate the scheduled payment made each period.

- **Effective Interest**: Represents the interest charged on the outstanding balance for that period.

- **Decrease in Balance**: Shows how much of the payment is reducing the lease liability.

- **Outstanding Balance**: Reflects the remaining balance after the decrease in balance is applied.

Please note that the final outstanding balance is adjusted to zero at the end of the lease term, signaling the lease is fully paid.

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