Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $89,000. Manufacturers Southern's fiscal year ends December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Related Information: Lease term 2 years (8 quarterly periods) Quarterly rental payments $16,000 at the beginning of each period Economic life of asset 2 years Fair value of asset $117,590 Implicit interest rate 10% Required: 1. Show how International Machines determined the $16,000 quarterly lease payments. 2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2018, and the second lease payment on April 1, 2018.

Answer 1

1
		PV of Lease:	$117,590	($16,000 x PVAD n=8, i=2.5)
				($16,000 x 7.3494)
		n = 8
		i = 2.5
		Lease Payment: $16,000
	Date	General Journal	Debit	Credit
	Jan. 1	Lease receivable	$117,590
		Cost of goods sold	$89,000
		Equipment		$89,000
		Sales revenue		$117,590
	Jan. 1	Cash	$16,000
		Lease receivable		$16,000
	Apr 1	Cash	$16,000
		Lease revenue		$2,540
		Lease receivable		$13,460
		Lease revenue = ($117,590 - $16,000) x 2.5%