Manufacturers Southern leased high-tech electronic equipment from Edison Leasing

Question

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2018. Edison purchased the equipment from International Machines at a cost of $127,650. (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 $16,800 at the beginning of each period Economic life of asset 2 years Fair value of asset $127,650 Implicit interest rate 6% (Also lessee’s incremental borrowing rate) Required: Prepare a lease amortization schedule and appropriate entries for Manufacturers Southern from the beginning of the lease through January 1, 2019. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis.

Explanation / Answer

Lease Term 2 years years (8 quarterly periods) Quarterly lease payments 16800 Interest rate charged by the lessor 6% 6/4 quarters = 1.5% lease amortization schedule Payment Date Lease Payments Interest Expense Decrease In balance Lease Balance 127,650 1 16800 16800 110,850 2 16800 1663 15137 95,713 3 16800 1436 15364 80,348 4 16800 1205 15595 64,754 5 16800 971 15829 48,925 6 16800 734 16066 32,859 7 16800 493 16307 16,552 8 16800 248 16552 0 Date Genera Journal Debit Credit 1/1/2018 Lease Receivable 127,650 Inventory of equipment 127,650 1/1/2018 Cash 16800 Lease Receivable 16800 3/31/2018 Cash 16800 Interest revenue 1663 Lease Receivable 15137 3/31/2018 Amortization expense 15956 Right-of-use equipment 15956 127650/8 6/30/2018 Cash 16800 Interest revenue 1436 Lease Receivable 15364 6/30/2018 Amortization expense 15956 Right-of-use equipment 15956 9/30/2018 Cash 16800 Interest revenue 1205 Lease Receivable 15595 9/30/2018 Amortization expense 15956 Right-of-use equipment 15956 12/31/2018 Cash 16800 Interest revenue 971 Lease Receivable 15829 12/31/2018 Amortization expense 15956 Right-of-use equipment 15956

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