Question

Peters Company leased a machine from Johnson Corporation on January 1, 2021. The machine has a...

Peters Company leased a machine from Johnson Corporation on January 1, 2021. The machine has a fair value of $15,000,000. The lease agreement calls for four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 12%.

Other information:

PV of an ordinary annuity @12% for 4 periods: 3.03735
PV of an annuity due @12% for 4 periods: 3.40183

Required:
1. Determine the amount of each lease payment.
2. Prepare the journal entry for Peters Company at the beginning of the lease.
3. Prepare the journal entry for the first lease payment (ignore amortization).
4. Prepare the journal entry for the second lease payment (ignore amortization).

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Homework Answers

Answer #1
1) Each lease payment = Fair value/Pv of ordinary annuity
15000000/3.03735
$4,938,515
2) Account Tilte and Explanation Debit Credit
Leased asset $15,000,000
     Lease payable $15,000,000
3) Interest expense (15000000*12%) $1,800,000
Lease payable $3,138,515
                   Cash $4,938,515
4) Interest expense (15000000-3138515)*12% $1,423,378
Lease payable $3,515,137
Cash $4,938,515
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