Manufacturers Southern leased high-tech electronic equipment from International
ID: 2328533 • Letter: M
Question
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $86,000. 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.)
Required:
1. Show how International Machines determined the $15,000 quarterly lease payments.
2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2018, and the second lease payment on April 1, 2018.
Explanation / Answer
International Machines
Lease term, n = 2 x 4 quarters = 8 periods
Fair value of asset = $113,973
Equipment cost = $86,000
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,
$113,973/7.5982 = $15,000 per quarter
Date
Account Titles and Explanation
Ref
Debit
Credit
1-Jan-18
Lease Receivable
$113,973
Cost of Goods Sold
$86,000
Inventory of Equipment
$86,000
Sales Revenue
$113,973
Cash
$15,000
Lease Receivable
$15,000
1-Apr-18
Cash
$15,000
Lease Revenue
$1,485
Lease Receivable
$13,515
Calculation of lease revenue as on April 1, 2018 –
Lease revenue =
= (113,973 – 15,000) x 1.5% = $1,485
Lease receivable = 15,000 – 1,485 = $13,515
Date
Account Titles and Explanation
Ref
Debit
Credit
1-Jan-18
Lease Receivable
$113,973
Cost of Goods Sold
$86,000
Inventory of Equipment
$86,000
Sales Revenue
$113,973
Cash
$15,000
Lease Receivable
$15,000
1-Apr-18
Cash
$15,000
Lease Revenue
$1,485
Lease Receivable
$13,515
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