Question

Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $310,000. The chronometers have a fair value of $403,000. 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 $22,548 at Jan. 1, 2018, 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 $17,403

Interest rate charged by the lessor 12%

Required:

1. Prepare appropriate entries for Newton Labs to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018.

2. Prepare appropriate entries for Brookline Instruments to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018.

Answer 1

Annual Interest Rate

12%

Quarterly interest

3%

(12/4)

Number of payments

20

PVA Factor=PV of annuityof $1

15.3238

(Using PV function of excelwith rate=3%,Nper=20, Pmt=-1, Type=1(Beging of period payments)

Quarterly Payments

$22,548

Present Value of Quarterly payments

$345,521

(15.3238*22548)

JOURNAL ENTRY

NEWTON LABS

Date

Account

Debit

Credit

Jan.01, 2018

Equipment

$345,521

Lease Liability

$345,521

Jan.01, 2018

Lease Liability

$22,548

Cash

$22,548

March.31,2018

Interest expense

$10,366

(345521*0.03))

Lease Liability

$12,182

(22548-10366)

Cash

$22,548

DEPRECIATION EXPENSE

March.31,2018

Depreciation   expense

$       13,672

((345521-17403)/6)*(1/4)

Accumulated depreciation

$ 13,672

JOURNAL ENTRY

BROOKLINE   INSTRUEMENTS

Date

Account

Debit

Credit

Jan.01, 2018

Lease receivable

$345,521

Equipment

$345,521

Jan.01, 2018

Cash

$22,548

Lease receivable

$22,548

March.31,2018

Cash

$22,548

Lease receivable

$12,182

Interest revenue

$10,366