Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $86,000. 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	$15,000 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$113,973
Implicit interest rate	6%

Required:
1. Show how International Machines determined the $15,000 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.

Answer 1

1

The Present value of quarterly lease payments will be shown using Present value annuity due (PVAD of $1)
TIme (n) = 8 quarters (2 years X 4 quarters)
Rate (r) = 1.5% (6%/4 quarters)
Lease payment = $15000
PV of lease = $113973 (Lease payment X PVAD of $1 at 1.5% for 8 periods) = ($15000 X 7.5982)
So, Quarterly payments = ($113973 / 7.5982) = $15000 per quarter

2

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
Jan 1, 2021	Lease receivable	113973
	Cost of goods sold	86000
	To Sales revenue		113973
	To Inventory of equipment		86000
	(Being inception of lease)
Jan 1, 2021	Cash	15000
	To Lease receivable		15000
	(Being receipt of lease rental)
April 1, 2021	Cash	15000
	To Lease receivable ($15000 - $1485)		13515
	To Interest revenue [($113973 - $15000) X 1.5%]		1485
	(Being receipt of lease rental)