Question

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2021. Edison purchased the equipment from International Machines at a cost of $127,024. (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	$17,000 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$127,024
Implicit interest rate	8%
(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, 2022. Amortization of the right-of-use asset is recorded at the end of each fiscal year (December 31) on a straight-line basis.

Answer 1

Solution:

PV Factor based on
Table or Calculator function	PVAD of $1
PV of lease	$127,024
n=	8
i=	2.00%
PV factor	7.47199
Lease Payment	$17,000

Payment Date	Lease payments	Effective interest	Decrease in balance	Lease balance
1-Jan-21				$127,024
1-Jan-21	$17,000	$0	$17,000	$110,024
1-Apr-21	$17,000	$2,200	$14,800	$95,224
1-Jul-21	$17,000	$1,904	$15,096	$80,129
1-Oct-21	$17,000	$1,603	$15,397	$64,732
1-Jan-22	$17,000	$1,295	$15,705	$49,026
1-Apr-22	$17,000	$981	$16,019	$33,007
1-Jul-22	$17,000	$660	$16,340	$16,667
1-Oct-22	$17,000	$333	$16,667	$0
Total	$136,000	$8,976

Manufacturers Southern
Journal Entries
Date	Particulars	Debit	Credit
1-Jan-21	Equipment Dr	$127,024.00
	To Lease Payable		$127,024.00
	(To record lease)
1-Jan-21	Lease Payable Dr	$17,000.00
	To Cash		$17,000.00
	(To record lease payment)
1-Apr-21	Interest expense Dr	$2,200.00
	Lease payable Dr	$14,800.00
	To Cash		$17,000.00
	(To record lease payment)
1-Jul-21	Interest expense Dr	$1,904.00
	Lease payable Dr	$15,096.00
	To Cash		$17,000.00
	(To record lease payment)
1-Oct-21	Interest expense Dr	$1,603.00
	Lease payable Dr	$15,397.00
	To Cash		$17,000.00
	(To record lease payment)
31-Dec-21	Depreciation expense Dr	$63,512.00
	To Accumulated depreciation - Equipment		$63,512.00
	(To record amortization)
31-Dec-21	Interest expense Dr	$1,295.00
	To Interest payable		$1,295.00
	(To record interest expense accured)
1-Jan-22	Interest payable Dr	$1,295.00
	Lease payable Dr	$15,705.00
	To Cash		$17,000.00
	(To record lease payment)