Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2024. International Machines manufactured the equipment at a cost of $96,000. Manufacturers Southern's fiscal year ends December 31.

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

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	$ 125,370
Implicit interest rate	6%

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, 2024, and the second lease payment on April 1, 2024.

Answer 1

Quarterly= 4

N= (2years*4)= 8                I=(6%/4)= 1.5%         

use PVAD of $1= 7.59821                                                   

  payment amount: 16,500                                                                                125,370/7.59821= 16,499.938801376

1) answer: PV factors based on

table or calculator	PVAD of $1
PV of lease	$ 125,370
n=	8
i=	1.5%
lease payment	16,500

2)

 

year	Lease   payments (a)	Effective   interest(1.5%* outstanding balance) (B)	Decrease in   outstanding balance C=A-B	Outstanding   balance (last year-C)
Jan1				125,370
Jan 1	16,500	0	16,500	108,870
April 1	16,500	1,633	14,867	94,003

 

Record the lease. Jan 1 2024

Dr. lease receivable           125,370

Dr. COGS                                96,000

   Cr. Sales revenue                               125,370

   Cr. Equipment                                     96,000

 

Record cash received. Jan 1 2024

Dr. Cash                          16,500

   Cr. Lease receivable               16,500

 

 

Record cash received. April 1 2024

Dr. Cash                                         16,500

   Cr. Interest revenue                               1,633

  Cr. Lease receivable                               14,867