Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $96,000. 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 $125,370 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, 2021, and the second lease payment on April 1, 2021. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Show how International Machines determined the $16,500 quarterly lease payments. (Round your intermediate and final answers to the nearest whole dollar. Round your percentage answer to 1 decimal place.) PV factors based on Table or Calculator function: PV of Lease Lease Payment

Answer 1

International Machines

1)Determination of quarterly lease payments:

Lease term, n = 2 x 4 quarters = 8 periods

Fair value of asset = $125370

Equipment cost = $96,000

Implicit interest rate, i = 6%, quarterly rate = 6%/4 = 1.5%

Present value of annuity at period start at 1.5%, 8 periods = 7.5982

Hence, quarterly payments is determined as follows,

$125370/7.5982 = $16,500 per quarter

2) Entries to record lease at the beginning, Jan 1, 2021 and second lease payment, April 1, 2021:

Date	Account Titles and Explanation	Ref	Debit	Credit
1-Jan-21	Lease Receivable		$125,370
	Cost of Goods Sold		$96,000
	Inventory of Equipment			$96,000
	Sales Revenue			$125,370
	Cash		$16,500
	Lease Receivable			$16,500
1-Apr-21	Cash		$16500
	Lease Revenue			$1,633
	Lease Receivable			$14,867

Calculation of lease revenue as on April 1, 2021–

Lease revenue =

= (125370 – 16,500) x 1.5% = $1,633

Lease receivable = 16,500 – 1,633= $14,867