Chapter 15, Problem 15.29E

Finance lease; purchase options; lessee

• LO15–2, LO15–6

Federated Fabrications leased a tooling machine on January 1, 2018, for a three-year period ending December 31, 2020. The lease agreement specified annual payments of $36,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2019. The company had the option to purchase the machine on December 30, 2020, for $45,000 when its fair value was expected to be $60,000, 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 12%.

Required:

1. 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease.
2. 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term.
3. 3. Prepare the appropriate entries for Federated from the beginning of the lease through the end of the lease term.