Question

Brief Exercise 21-11

Indigo Corporation manufactures replicators. On January 1, 2017, it leased to Althaus Company a replicator that had cost $111,400 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of $41,900 payable each January 1, beginning January 1, 2017. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs.

Prepare Indigo’s January 1, 2017, journal entries. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2017
Jan. 1, 2017
Jan. 1, 2017

Answer 1

Date	Account title	Debit	Credit
Jan.1,2017	Lease receivable	167550
	Asset		167550
	(Leasing of the asset)
Jan.1,2017	Cash	41500
	Lease receivable		41500
	(1st lease payment received)

Working:

Date	Beg.Bal.	Interest	Cash	Lease Rental
		Income	Received	Accounted
Jan.1,2017	167550	0	41500	41500
Jan.1,2018	126050	15126	41500	26374
Jan.1,2019	99676	11961	41500	29539
Jan.1,2020	70137	8416	41500	33084
Jan.1,2021	37054	4446	41500	37054
T o t a l		39950	207500	167550
Present value of 41,500 received annualy for five years
				167,550
This is arrived at usin the following formula.
PV = Ax (1-(1/(1+r)^n)/r) x (1+r)
Where A = 41,500, r=12% and n=5