Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $100,000. 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 $16,500 at the beginning of each period Economic life of asset 2 years Fair value of asset $123,288 Implicit interest rate 8% Required: 1. Show how International Machines determined the $16,500 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.

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $100,000. 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 Quarterly rental payments Economic life of asset Fair value of asset Implicit interest rate 2 years (8 quarterly periods) $16,500 at the beginning of each period 2 years $123,288 8% Required: 1. Show how International Machines determined the $16,500 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. Complete this question by entering your answers in the tabs below.

Answer 1

Given,

The cost of the equipment is $100,000.

The quarterly rental payment is $16,500

The lease term is 2 years (8 quarterly periods)

The interate rate is 8% annually, that is 2% quarterly (10%/4)

Calculation of the present value of Lease :

present value = Annuity * [1-1/(1+Interest rate )^ no.of periods] /Interest rate *(1+Interest rate )

= 16500*[1-1/(1+2%)^8]/2% *(1+2%)

=$ 1,23,288 (approx).

Table or calculator function :	Present value annuity due
PV of lease	$ 1,23,288.00
n=	8
i=	2
lease payment	16500

Journal entries for the International Machines ...

Date	Transaction	Debit $	Credit $
1. Jan	Lease receivables	1,23,288
	Cost of goods sold	1,00,000
	Sales revenue		1,23,288
	Inventory of Equipment		1,00,000
	(To record the inception of lease)
1. Jan	Cash	16500
	Lease receivables		16500
	(T0 record the receipt of lease rental)
1. Apr	Cash	16500
	Lease receivables		14364
	Interest revenue		2136
	(To record the receipt of lease rental)