Question

Newton Labs leased chronometers from Brookline Instruments on January 1, 2021. Brookline Instruments manufactured the chronometers at a cost of $270,000. The chronometers have a fair value of $309,337. Appropriate adjusting entries are made quarterly. (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		5 years (20 quarterly periods)
Quarterly lease payments	$	19,639 at Jan. 1, 2021, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset		6 years
Estimated residual value of chronometers at end of lease term	$	15,158
Interest rate charged by the lessor		12%

Required:
1. Prepare appropriate entries for Newton Labs to record the arrangement at its commencement, January 1, 2021, and on March 31, 2021.
2. Prepare appropriate entries for Brookline Instruments to record the arrangement at its commencement, January 1, 2021, and on March 31, 2021.

Answer 1

Requirement 1. Prepare appropriate entries for Newton Labs to record the arrangement at its commencement, January 1, 2021, and on March 31, 2021.

Solution:-

Date	Accounts Explanation and Title	Debit	Credit
Jan 1 , 2021	Right of use assets (Working Note)	$300,944
	Lease payable		$300,944
	(To record the beginning of the lease for Newton Labs)
Jan 1, 2021	Lease Payable (give)	$19,639
	Cash		$19,639
	(To record the quaterly rental paid by Newton Labs)
Mar 31 , 2021	Interest Expense (Working Note)	$8,439
	Lease Payable ($19,639 - $8,439)	$11,200
	Cash		$19,639
	(To record the quaterly rental and interest paid by Newton labs)
Mar 31 , 2021	Amortization Expense ($300,944 / 20)	$15,047.20
	Right of use of Assets		$15,047.20
	(To record the amortization of right of use equipment)

Working Note:-

• Calculation of Present value of Lease payable

Annual lease payment * PVAD (rate, time)

=$19,639 * PVAD (12% / 4quarter , 20)

=$19,639 * PVAD (3% , 20)

= $19,639 * {[(1-(1+.03)^-20] / 0.03} + 1

Present value of Lease payable = $300,944

• Calculation of Interest expense

Interest Expense =(Present value of Lease Payable - Lease payment made on january 1, 2021) * Quaterly Interest Rate

Interst Expense = ($300,944 - $19,639) * 3%

Interst Expense = $8,439.15 or $8,439

Requirement 2. Prepare appropriate entries for Brookline Instruments to record the arrangement at its commencement, January 1, 2021, and on March 31, 2021.

Solution:-

Date	Accounts Explanation and Titles	Debit	Credit
Jan 1, 2021	Lease Receivable (Working Note)	$311,818
	Cost of Goods sold (Working Note)	$259,126
	Sales Revenue		$300,944
	Equipment (Given)		$270,000
	(To record the beginning of the lease and sales revenue for Brookline Instruments)
Jan 1 , 2021	Cash	$19,639
	Lease Receivable		$19,639
	(To record the lease revenue received by Brookline Instruments)
Mar 31 , 2021	Cash	$19,639
	Lease Receivable ($19,639 - $8,765)		$10,874
	Interest Revenue (Working Note)		$8,765

Working Note:-

• Calculation of Lease Receivable

Lease Receivable = $19,639 * PVAD (3% , 20) + ($19,639 * PV (3% ,20)

Lease Receviable = ( $19,639 * {[(1-(1+.03)^-20] / 0.03} + 1) + [$19,639 * (1 / 1 + 0.03)^20)

Lease Receiable = $300,944 + ($19,639 * 0.55368...)

Lease Receiable = $300,944 + $10,873.64

Lease Receiable = $311,817.64 / 311,818

• Calculation of Cost of Goods Sold

Cost of Goods Sold = Cost - Present Value of residual value

Cost of Goods Sold = $270,000 - [($19,639 * 1/(1 + 0.03)^20 ]

Cost of Goods Sold = $270,000 - ($19,639 * 0.55638)

Cost of Goods Sold = $270,000 - $10,873.64

Cost of Goods Sold = $259,126.36

• Calculation of Interest Revenue

Interest Revenue = (Lease Receivable - Lease payment made on jan 1 , 2021 ) * Interest rate

Interest Revenue = ( $311,818 - $19,639) * 3%

Interest Revenue = $8765.37 / 8765

Thank you..

I hope I was able to help you