Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $102,000. 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	$16,700 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$124,782
Implicit interest rate	8%

Required:
1. Show how International Machines determined the $16,700 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

Solution 1:

PV Factor based on
Table or Calculator function	PVAD of $1
PV of lease	$124,782
n=	8
i=	2.00%
PV factor	7.47199
Lease Payment	$16,700

Solution 2:

International Machines
Journal Entries
Date	Particulars	Debit	Credit
1-Jan-21	Lease receivables Dr	$124,782.00
	Cost of goods sold Dr	$102,000.00
	To Sales revenue		$124,782.00
	To Inventory		$102,000.00
	(To record lease)
1-Jan-21	Cash Dr	$16,700.00
	To Lease receivables		$16,700.00
	(To record receipt of lease payment)
1-Apr-21	Cash Dr	$16,700.00
	To Lease receivables		$14,538.00
	To Interest revenue [($124,782 - $16,700)*2%]		$2,162.00
	(To record receipt of lease payment)