Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

Lease payments: ????????? semiannually; first payment at January 1, 2021

; remaining payments at June 30 and December 31 each year through June 30, 2025.

Lease term: five years (10 semiannual payments).

residual value $500,000; And the lessee guaranteed a residual value of $600,000

Economic life of equipment: 6 years.

Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.

Fair value of the computers at January 1, 2021: $20 million.

1. Calculate the lease payment? Show all calculations
2. Prepare the journal entries by lessee on the date of lease inception

Answer 1

Computation of Annual Rental Payment
Fair Value	$20,000,000.00
Less: Residual Value ( 600000X Pvif @ 5%, 10) (600000 X0.613913254)	-$368,347.95
Amount to be recovered a)	$19,631,652.05
CUMM PVF @ 5% for 0-9 (b)	8.1078
Annual Rental Payment (a/b)	$2,421,329.10

Date	Accoutn Tittle	Debit	Credit
1-Jan-21	Lease Equipment	$2,000,000.00
	Lease Liability		$2,000,000.00
1-Jan-21	Lease Liability	$2,421,329.00
	Cash		$2,421,329.00