Question

Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2021. Insight Machines manufactured the equipment at a cost of $350,000 and lists a cash selling price of $437,810. Appropriate adjusting entries are made quarterly.

Related Information:

Lease term 5 years (20 quarterly periods)
Quarterly lease payments $26,250 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 8%

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

we must first determine the present value of the lease payments:

PV of lease payments = quarterly payment x annuity factor

• quarterly payment = $26,250
• PV annuity due factor, 2%, 20 periods = 16.67846

PV of lease payment = $26,250 x 16.67846 = $437,809.56 ≈ $437,810

January 1, 2021, equipment leased from Insight Machines

Dr Right of use asset 437,810

Cr Lease payable 437,810

January 1, 2021, first lease payment

Dr Lease payable 26,250

Cr Cash 26,250

March 31, 2021, second lease payment

Dr Lease payable 18,019

Dr Interest expense 8,231

Cr Cash 26,250

interest expense = ($437,810 - $26,250) x 2% = $8,231

March 31, 2021, amortization expense

Dr Amortization expense 21,891

Cr Right of use asset 21,891

amortization expense = $437,810 / 20 = $21,891

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

January 1, 2021, equipment leased to Eye Deal

Dr Lease receivable 437,810

Cr Lease revenue 437,810

Dr Cost of goods sold 350,000

Cr Equipment 350,000

January 1, 2021, first lease payment

Dr Cash 26,250

Cr lease receivable 26,250

March 31, 2021, second lease payment

Dr Cash 26,250

Cr Lease receivable 18,019

Cr Interest revenue 8,231