Question

Natick Industries leased high-tech instruments from Framingham Leasing on January 1, 2021. Natick has the option to renew the lease at the end of two years for an additional three years. Natick is subject to a $45,000 penalty after two years if it fails to renew the lease. Framingham Leasing purchased the equipment from Waltham Machines at a cost of $250,177.

Related Information:
Lease term 2 years (8 quarterly periods)
Lease renewal option for an additional 3 years (12 quarterly periods)
Quarterly lease payments $11,000 at Jan. 1, 2021, and at Mar.
31, June 30, Sept. 30, and Dec. 31
thereafter
Economic life of asset 5 years
Interest rate charged by the lessor. 4%
Required:
Prepare appropriate entries for Natick Industries from the beginning of the lease through March 31, 2021. Appropriate adjusting entries are made quarterly.

Answer 1

The journal entries for Natick Industries would include lease inception, quarterly payment, interest expense, and end-of-quarter adjusting entries from the beginning of the lease on January 1, 2021, through March 31, 2021.

Step-by-step explanation:

The student is asking for the journal entries that would be appropriate for Natick Industries in accounting for a lease from Framingham Leasing. Given the inception of the lease on January 1, 2021, and a quarterly payment schedule with the first payment due on the lease date, the entries would reflect the initial recognition of the lease liability and right-of-use asset, followed by the payment and interest accrual entries up to March 31, 2021.

Journal Entries from Lease Inception through March 31, 2021

1. Lease commencement (January 1, 2021):
   
2. First quarterly payment (January 1, 2021):
   
3. Interest expense for the quarter ending March 31, 2021:
   
4. End of quarter adjusting entry (March 31, 2021):
   

The specific amounts for the right-of-use asset, lease liability, interest expense, and amortization would be calculated based on the terms of the lease including the lease payments, interest rate, and the economic life of the asset. Typically, a present value calculation would be required to determine the initial lease liability and the corresponding right-of-use asset, and subsequent entries would depend on the amortization schedule and interest calculations.