Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $90,000. 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	$15,500 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$117,772
Implicit interest rate	6%

Required:
1. Show how International Machines determined the $15,500 quarterly lease payments.
2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2021, and the second lease payment on April 1, 2021.

Record the lease. 1/1/2021

Record cash received. 1/1/2021

Record cash received. 4/1/2021

Answer 1

1) Period = 2*4 = 8 Quarterly Rate = 6%/4 = 1.5% Quarterly Present Value Annuity Factor (PVAF) As per Table = 7.59821 Present Value of Lease Payments = Lease Payment * PVAF = $15500 * 7.59821 = $117772 (Round off in whole $) 2) Journal Entries :- Date Particulars Debit($) Credit($) Jan.1, 2021 Lease Receivable A/c Dr. 117772 Cost of goods sold A/c Dr. 90000 To Sales Revenue A/c 117772 To Inventory of Equipment A/c 90000 Jan.1, 2021 Cash A/c Dr. 15500 To Lease Receivable A/c 15500 Apr.1, 2021 Cash A/c Dr. 15500 To Lease Receivable A/c ($15500-$1534) 13966 To Interest Revenue A/c 1534 ((($117772-$15500)*6%)/4)