Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $94,000. 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 $18,200 at the beginning of each period Economic life of asset 2 years Fair value of asset $138,287 Implicit interest rate 6% Required: 1. Show how International Machines determined the $18,200 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. $18,200 per quarter

2. 1-Jan-21

Dr Lease Receivable $138,287

Dr Cost of Goods Sold $94, 000

Cr Inventory of Equipment $94,000

Cr Sales Revenue $138,287

Dr Cash $18,200

Cr Lease Receivable $18,200

1-Apr-21

Dr Cash $18,200

Cr Lease Revenue $1,801

Cr Lease Receivable $16,399

Step-by-step explanation:

1. Calculation to Show how International Machines determined the $18,200 quarterly lease payments

First step is to find the Present value of annuity at period start

Lease term=n = 2 x 4 quarters

Lease term=n= 8 periods

Fair value of asset = $138,287

Implicit interest rate, i = 6%, quarterly rate = 6%/4 Implicit interest rate= 1.5%

Present value of annuity at period start at 1.5%, 8 periods

Present value of annuity at period start = 7.5982

Now let determine the quarterly payments

Quarterly payments= $138,287/7.5982

Quarterly payments = $18,200 per quarter

Therefore the quarterly lease payments is $18,200

2) Preparation of the appropriate entries for International Machines to record the lease at its beginning, January 1, 2021, and the second lease payment on April 1, 2021.

1-Jan-21

Dr Lease Receivable $138,287

Dr Cost of Goods Sold $94, 000

Cr Inventory of Equipment $94,000

Cr Sales Revenue $138,287

(To record lease at its beginning)

Dr Cash $18,200

Cr Lease Receivable $18,200

(To record lease at its beginning)

1-Apr-21

Dr Cash $18,200

Cr Lease Revenue $1,801

Cr Lease Receivable $16,399

(To record second lease payment)

Calculation of lease revenue as on April 1, 2021

Lease revenue = ($138,287 – $18,200) x 1.5%

Lease revenue= $120,087×1.5%

Lease revenue= $1,801

Lease receivable = $18,200 – $1,801

Lease receivable = $16,399