Manufacturers Southern leased high-tech electronic equipment from International
ID: 2553016 • Letter: M
Question
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. Internat manufactured the equipment at a cost of $105,000. Manufacturers Southern's fiscal year ends December 31. (FV of $1, PV of $1, EVA of $1. PVAofS1. EVAD of$1 and PVADOS) (Use appropriate factor(s) from the tables provided.) ional Machines Related Information Lease term Quarterly rental payments Economio life of asset Fair value of asset Implieit interent rate 2 years (8 quarterly periods) 17,000 at the beginning of each period 2 years 127,024 Required 1. Show how International Machines determined the $17,000 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
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Solution:
Payment Date
Lease Payments
Effective interest
Decrease in balance
Lease Balance
01/01/2018
17,000
17,000
127,024
04/01/2018
17,000
2,200
14,800
110,024
07/01/2018
17,000
1,904
15,096
95,224
10/01/2018
17,000
1,603
15,397
80,128
01/01/2019
17,000
1,295
15,705
64,731
04/01/2019
17,000
981
16,019
49,026
07/01/2019
17,000
660
16,340
33,007
10/01/2019
17,000
333
16,667
16,667
Total
136,000
8,976
127,024
0
Working:
PV of lease payments: 17,000 * 7.47199 = 127,024
Lease Payments
Effective interest
Decrease in balance
Outstanding balance
1
17,000
17,000
127,024
2
17,000
0.020 * 110,024 = 2,200
14,800
110,024
3
17,000
0.020 * 95,224 = 1,904
15,096
95,224
4
17,000
0.020 * 80,128 = 1,603
15,397
80,128
5
17,000
0.020 * 64,731 = 1,295
15,705
64,731
6
17,000
0.020 * 49,026 = 981
16,019
49,026
7
17,000
0.020 * 33,007 = 660
16,340
33,007
8
17,000
0.020 * 16,667 = 333
16,667
16,667
8976
127,024
0
April 1, 2018: Interest expense: (2% * [$127,024 – 17,000]) = $2,200
July 1, 2018: Interest expense: (2% * $95,224) = $1,904
October1, 2018: Interest expense: (2% * $80,128) = $1,603
December 31, 2018: Interest expense: (2% * $64,731) = $1,295
Amortization expense: ($127,024 / 2 years ) = $63,512
Payment Date
Lease Payments
Effective interest
Decrease in balance
Lease Balance
01/01/2018
17,000
17,000
127,024
04/01/2018
17,000
2,200
14,800
110,024
07/01/2018
17,000
1,904
15,096
95,224
10/01/2018
17,000
1,603
15,397
80,128
01/01/2019
17,000
1,295
15,705
64,731
04/01/2019
17,000
981
16,019
49,026
07/01/2019
17,000
660
16,340
33,007
10/01/2019
17,000
333
16,667
16,667
Total
136,000
8,976
127,024
0
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