Solution 1:
Let effective interest rate implicit in lease = i
Now at i present value of lease payment = Fair value of machine
Cumulative PV Factor at i for 4 periods = $9,719,160 / $3,000,000 = 3.23972
Refer PV factor table, this factor falls at i = 9%
Therefore implicit interest rate in lease = 9%
Solution 2-4:
Journal Entries - VHF Industries | |||
Date | Particulars | Debit | Credit |
1-Jan-21 | Machinery Dr | $9,719,160.00 | |
To Lease Payable | $9,719,160.00 | ||
(To record machiney purchased on lease) | |||
31-Dec-21 | Interest expense Dr ($9,719,160*9%) | $874,724.00 | |
Lease Payable Dr | $2,125,276.00 | ||
To Cash | $3,000,000.00 | ||
(To record lease payment) | |||
31-Dec-22 | Interest expense Dr [($9,719,160 - $2,125,275)*9%] | $683,450.00 | |
Lease Payable Dr | $2,316,550.00 | ||
To Cash | $3,000,000.00 | ||
(To record lease payment) |
Solution 5:
Fair value of machine = $3,000,000 * Cumulative PV Factor at 8% for 4 periods
= $3,000,000 * 3.31213 = $9,936,390
Journal Entries - VHF Industries | |||
Date | Particulars | Debit | Credit |
1-Jan-21 | Machinery Dr | $9,936,390.00 | |
To Lease Payable | $9,936,390.00 | ||
(To record machiney purchased on lease) |
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