Question

Pronghorn Corporation manufactures replicators. On January 1, 2017, it leased to Althaus Company a replicator that had cost $100,000 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of $40,200 payable each January 1, beginning January 1, 2017. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs.

Prepare Pronghorn’s January 1, 2017, journal entries.

Answer 1

PV of lease = 40200 × annuity factor

Annuity factor = (1-(1+r)^-n)/r

Where r = 12%

n = 5

= 3.605

Therefore asset value = 40200 × 3.605 = 144912.0033

Journal entries on 1 january:

1) lease receivable a/c . 144912

To asset a/c . 144912

(To record the lease)

2) cost of good sold a/c. 100000

To inventory a/c. 100000

( To record the cost)

3) cash a/c . 40200

To lease receivable 40200

(To record first lease payment)

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