Question

Problem 15-2 (Algo) Finance lease [LO15-2) At the beginning of 2021, VHF Industries acquired a machine with a fair value of $5,411,910 by signing a three-year lease. The lease is payable in three annual payments of $2.1 million at the end of each year. (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.) Required: 1. What is the effective rate of interest implicit in the agreement? 2-4. Prepare the lessee's journal entries at the beginning of the lease, the first lease payment at December 31, 2021 and the second lease payment at December 31, 2022. 5. Suppose the fair value of the machine and the lessor's implicit rate were unknown at the time of the lease, but that the lessee's incremental borrowing rate of interest for notes of similar risk was 9%. Prepare the lessee's entry at the beginning of the lease. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 and 4 Req 5 What is the effective rate of interest implicit in the agreement? The implicit interest rate Req1 Req 2 and 4 >

Answer 1

Required 1 :

The Implicit Interest Rate = 8%

Explanation :

Present value of annuity * $ 2,100,000 = $ 5,411,910

Present value of annuity = $ 5,411,910 / $ 2,100,000

Present value of annuity = 2.5771

The discount rate for 3 payments that can be equal

to 2.57710 is 8 % (As per Table 4 )

Required 2 :
Date	General Journal	Debit	Credit
01-01-2021	Machine	$ 5,411,910
	Installment Notes Payable		$ 5,411,910
	(To record beginning of lease )

_{Required 3 :}

Date	Payment	Interest(8%)	Principal	Balance
01-01-2021				$ 5,411,910
12/31/2021	$2,100,000	$ 432,953 {5,411,910*8%}	$1,667,047 {$2,100,000-432,953}	$ 3,744,863
12/31/2022	$2,100,000	$ 299,589 {3,744,863*8%}	$1,800,411 {$2,100,000-299,589}	$ 1,944,452
12/31/2023	$2,100,000	$ 155,548 {2,100,000-1,944,452}	$ 1,944,452	$ 0

Date	General Journal	Debit	Credit
12/31/2021	Installment Notes Payable	$ 1667,047
	Interest Expense	$ 432,953
	Cash		$ 2,100,000
	(To record first lease payment at December 31,2021)

Required 4 ;

Date	General Journal	Debit	Credit
12/31/2022	Installment Notes Payable	$ 1,800,411
	Interest Expense	$ 299,589
	Cash		$ 2,100,000
	(To record second lease payment at December 31,2022)

Required 5 :

Present value of the future payments :

3 payments @ 11 % = $ 2.53129* $ 2,100,000 = $ 5,315,709

Present value of annuity N= 3 payments i= 9 % is $ 2.53129

Date	General Journal	Debit	Credit
01-01-2021	Machine	$ 5,315,709
	Installment Notes Payable		$ 5,315,709
	(To record Lessee's entry at beginning of lease )