Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $104,000. 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 term2 years (8 quarterly periods)

Quarterly rental payments$18,200 at the beginning of each period

Economic life of asset2 years

Fair value of asset$135,990

Implicit interest rate8%

Required:
1. Show how International Machines determined the $18,200 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.

Answer 1

Computation of Lease Payment

PVF of 8% for 2 year ie. 2% for 8 period= 7.472

Present Value of Lease Payment=Lease PaymentX PVAF

=$18200X 7.472= $135990

S. No.	Accounts Title and explanations	Debit $	Credit $
01-Jan	Lease Receivable	1,35,990.00
	Cost of Goods Sold	1,04,000.00
	Sales Revenue		1,35,990.00
	Inventory of Equiment		1,04,000.00
	To Record Lease at inception
01-Jan	Cash	18,200.00
	Lease Receivable		18,200.00
	To Record Lease Rental Received
01-Apr	Cash	18,200.00
	Lease Receivable (18200-2356)		15,844.00
	Interest Revenue (135990-18200)*8%/4		2,356.00
	To Record Lease Rental Received

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