Question

Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2021. Insight Machines manufactured the equipment at a cost of $320,000 and lists a cash selling price of $437,424. Appropriate adjusting entries are made quarterly.

Related Information:
Lease term 5 years (20 quarterly periods)
Quarterly lease payments $24,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset 5 years
Interest rate charged by the lessor 4%

Required:
a. Prepare appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.
b. Prepare appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.

Answer 1

A. In the Books of Eye Deal

1-Jan

Dr Right of use asset $437,424

Cr Lease payabe $437,424

1-Jan

Dr Lease Payable $24,000

Cr Cash $24,000

31-March

Dr Interest expense $4,134.24

Dr Lease Payable $19,865.76

Cr Cash $24,000

31-Mar

Dr Amortization expense$21,871.2

Cr Right of use asset $21,871.2

B. Insight Machines:

1-Jan

Dr Lease receivable $437,424

Cr Cost of goods sold $320,000

Dr Sales revenue $437,424

Cr Equipment $320,000

1-Jan

Dr Cash $24,000

Cr Lease receivable $24,000

31-Mar

Dr Cash $24,000

Cr Interest revenue $4,134.24

Cr Lease receivable $19,865.76

Step-by-step explanation:

A. Preparation of the appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.

In the Books of Eye Deal

1-Jan

Dr Right of use asset $437,424

Cr Lease payabe $437,424

1-Jan

Dr Lease Payable $24,000

Cr Cash $24,000

31-Mar

Dr Interest expense $4,134.24

($437,424-$24,000)*1%

Dr Lease Payable $19,865.76

($24,000-$4,134.24)

Cr Cash $24,000

31-Mar

Dr Amortization expense

($437,424/20) $21,871.2

Cr Right of use asset $21,871.2

B. Preparation of the appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.

Insight Machines:

1-Jan

Dr Lease receivable $437,424

Cr Cost of goods sold $320,000

Dr Sales revenue $437,424

Cr Equipment $320,000

1-Jan

Dr Cash $24,000

Cr Lease receivable $24,000

31-Mar

Dr Cash $24,000

Cr Interest revenue

($437,424-$24,000)*1% $4,134.24

Cr Lease receivable $19,865.76

($24,000-$4,134.24)

Interest Rate=4%/4=1%

N=(5 years*4=20 quarterly period)