Question

Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $130,000. The chronometers have a fair value of $169,000. 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	$9,457 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	$7,300
Interest rate charged by the lessor	16%

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

1. In the books of Newton Labs:
Date	Account title	Debit	Credit
Jan.1,2018	Asset	133665
	Lease Payable		133665
	(Leasing of the asset)
Jan.1,2018	Lease Payable	41500
	Cash		41500
	(1st lease payment)
Mar.30,2018	Lease Payable	4489
	Interest Expense	4968
	Cash		9457
	(2nd lease payment)

2. In the books of brookline instruments:
Date	Account title	Debit	Credit
Jan.1,2018	Lease receivable	133665
	Asset		133665
	(Leasing of the asset)
Jan.1,2018	Cash	41500
	Lease receivable		41500
	(1st lease payment received)
Mar.30,2018	Cash	9457
	Interest Income		4968
	Lease receivable		4489
	(2nd lease payment received)

Working:

Date	Beg.Bal.	Interest	Cash	Lease Rental
		Income	Received	Accounted
Jan.1, 2018	133665	0	9457	9457
Mar.31,2018	124208	4968	9457	4489
Sep.30, 2018	119719	4789	9457	4668
Dec.31,2018	115051	4602	9457	4855
Mar.31 , 2019	110196	4408	9457	5049
Jun.30, 2019	105147	4206	9457	5251
Sep.30 , 2019	99896	3996	9457	5461
Dec.31,2019	94435	3777	9457	5680
Mar.31 , 2020	88755	3550	9457	5907
Jun.30, 2020	82848	3314	9457	6143
Sep.30 , 2020	76705	3068	9457	6389
Dec.31,2020	70316	2813	9457	6644
Mar.31 , 2021	63672	2547	9457	6910
Jun.30, 2021	56762	2270	9457	7187
Sep.30 , 2021	49575	1983	9457	7474
Dec.31,2021	42101	1684	9457	7773
Mar.31 , 2022	34329	1373	9457	8084
Jun.30, 2022	26245	1050	9457	8407
Sep.30 , 2022	17837	713	9457	8744
Dec.31,2022	9094	364	9457	9093
T o t a l		55476	189140	133664
Present value of 9,457 received quarterly for five years
133665.00
This is arrived at using the following formula.
PV = Ax (1-(1/(1+r)^n)/r) x (1+r)
Where A = 9,457, r=4% and n=20 (5 years x 4 qrtrs)