Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured...

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

Homework Answers

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)
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