Question

Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2021. Insight Machines manufactured the equipment at a cost of $220,000 and lists a cash selling price of $275,195. Appropriate adjusting entries are made quarterly. (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 5 years (20 quarterly periods)
Quarterly lease payments $24,000 at Jan. 1, 2021, 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:
1. Prepare appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2018, and on March 31, 2021.
2. Prepare appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.

Answer 1

Answer and Explanation:

The journal entries are shown below:

1. For Eye deal:

On January 1,2018

Right of use asset $275,195

To Lease payable $275,195

(Being the lease payable is recorded)

On January 1,2018

Lease payable $24,000

To Cash $24,000

(Being the lease payment is paid)

On March 31,2018

Interest expense $2,511.95 {($275,195 - $24,000) × 4% × 3 months ÷ 12 months }

Lease payable $21 ,488.05

To Cash $24,000

(Being the lease payment and interest is paid)

On March 31,2018

Amortization expense $13,759.75 ($275,195 ÷ 20 )

To Right of use asset $13,759.75

(being the amortization expense is recorded)

2 For insight machines:

On January 1,2018

Lease receivable $275,195

Cost of goods sold $220,000

To Sales revenue $275,195

To Equipment $220,000

(being the sales and cost is recorded)

On January 1,2018

Cash $24,000

To Lease receivable $24,000

(being cash received is recorded)

On March 31,2018

Cash $24,000

To Interest revenue $2,511.95 {($275,195 - $24,000) × 4% × 3 months ÷ 12}

To Lease receivable $21 ,488.05

(being cash received is recorded)