Question

Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2021. Edison purchased the equipment from International Machines at a cost of $113,515. (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	$15,700 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$113,515
Implicit interest rate	12%
(Also lessee’s incremental borrowing rate)

Required:
Prepare a lease amortization schedule and appropriate entries for Edison Leasing from the beginning of the lease through January 1, 2022. Edison’s fiscal year ends December 31.

Answer 1

Amortization table:

Lease Amortization Schedule
Year	Lease Payments	Effective Interest	Decrease in Balance	Outstanding Balance
Jan 1,2021				$113,515
Jan 1,2021	$15,700		$15,700	$97,815
Apr 1,2021	$15,700	$2,934	$12,766	$85,049
July 1,2021	$15,700	$2,551	$13,149	$71,901
Oct 1,2021	$15,700	$2,157	$13,543	$58,358
Jan 1,2022	$15,700	$1,751	$13,949	$44,409
Apr 1,2022	$15,700	$1,332	$14,368	$30,041
July 1,2022	$15,700	$901	$14,799	$15,242
Oct 1,2022	$15,700	$457	$15,242*	$0

*rounded to $1

Effective interest = Preceding outstanding balance x 3% [12% per year, 3% per quarter]

Decrease in Balance = Lease payments - Effective interest

Outstanding balance = Preceding outstanding balance - Decrease in balance

Journal Entries:

Date	Account title and Explanation	Debit	Credit
1/1/2021	Right-of-use asset	$113,515
	Lease liability		$113,515
	[To record lease liability]
1/1/2021	Lease liability	$15,700
	Cash		$15,700
	[To record payment lease payment]
4/1/2021	Lease liability	$12,766
	Interest expense	$2,934
	Cash		$15,700
	[To record payment lease payment]
7/1/2021	Lease liability	$13,149
	Interest expense	$2,551
	Cash		$15,700
	[To record payment lease payment]
10/1/2021	Lease liability	$13,543
	Interest expense	$2,157
	Cash		$15,700
	[To record payment lease payment]
12/31/2021	Interest expense	$1,751
	Lease liability		$1,751
	[To record interest expense]
1/1/2022	Lease liability	$15,700
	Cash		$15,700
	[To record payment lease payment]

Answer 2

January 1, 2021 Lease receivable. 113,515 Equipment. 113,515 Cash. 15,700 Lease receivable. 15,700 April 1, 2021 Cash. 15,700 Interest receivable. 12766 Interest revenue. 2934 July 1, 2021 Cash. 15,700 Lease receivable. 13,149 Interest Revenue. 2551 October 1, 2021 Cash. 15,700 Lease receivable. 13,543 Interest Revenue. 2157 December 31, 2021 Interest receivable. 1751 Interest Revenue. 1751 January 1, 2022 Cash. 15,700 Lease receivable. 13,949 Interest receivable. 1751