Manufacturers Southern leased high-tech electronic equipment from International

Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. 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.)

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, 2018, and the second lease payment on April 1, 2018.

a. Record the lease.

b. Record cash received. (Jan 1)

c. Record cash received. (Apr 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%

Explanation / Answer

1 Fair value of asset=$125370 Interest per quarter=6/4=1.5% Year PV @1.5% Lease rental=Fair value of asset/P.V of interest per quarter for 8 years 0 1 Lease rental=125370/7.598=16500 1 0.985222 (Note that lease payment is at the beginning) 2 0.970662 (So present value=1+P.V of interest per quarter for 7 years) 3 0.956317 4 0.942184 2 Date Account titles and explanation Debit Credit 5 0.92826 2018 6 0.914542 Jan 1. Lease receivable 125370 7 0.901027 Cost of goods sold 96000 Total 7.598214 Inventory 96000 Sales revenue 125370 (To record the lease) Cash 16500 Lease receivable 16500 (To record cash received) Cash 16500 Lease revenue (125370-16500)*1.5% 1633 Lease receivable 14867 (To record cash received)

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