Question

Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $110,000. The chronometers have a fair value of $143,000. 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	$8,003 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	$6,177
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

1. In the books of Newton Labs :

Date	Account Titles	Debit	Credit
01-Jan-18	Right to Use	122636
	Lease Payable		122636
	[To record beginning of Lease]
01-Jan-18	Lease Payable	8003
	Cash		8003
	(Quarterly rent paid)
31-Mar-18	Interest Expenses	3438.99
	Lease Payable	4564.01
	Cash		8003
	(Quarterly Rent and Interest Paid)
31-Mar-18	Amortization Expense	6131.8
	Right to Use		6131.8
	(Amortization of Right to Use equipment)

2. In the books of Brookline Instruments

01-Jan-18	Lease Receivable	122636
	Right to Use Asset		122636
	[To record beginning of Lease]
31-Mar-18	Cash	8003
	Lease receivable		8003
	(Quarterly Lease rental received)
31-Mar-18	Cash	8003
	Lease receivable		3438.99
	Interest Revenue		4564.01
	(Quarterly Lease rent and interest received)

Calculations:

Right to use of Asset = Quaterly Lease Payment * (( 1-[(1+r) ^-(n-1) /r])+1)

Rate = 12%/4= 3%

= 8003* (( 1-[(1+0.03) ^-(20-1) /0.03])+1) = 122636

Depreciation = 122636 / 20 = 6131.8

Amortization Schedule

Period	Interest (Carrying Value *3%)	Principal Component [8003-Interest]	Carrying Value
0	0	0	122636
1	0.00	8003.00	114633.00
2	3438.99	4564.01	110068.99
3	3302.07	4700.93	105368.06
4	3161.04	4841.96	100526.10
5	3015.78	4987.22	95538.88
6	2866.17	5136.83	90402.05
7	2712.06	5290.94	85111.11
8	2553.33	5449.67	79661.45
9	2389.84	5613.16	74048.29
10	2221.45	5781.55	68266.74
11	2048.00	5955.00	62311.74
12	1869.35	6133.65	56178.09
13	1685.34	6317.66	49860.44
14	1495.81	6507.19	43353.25
15	1300.60	6702.40	36650.85
16	1099.53	6903.47	29747.37
17	892.42	7110.58	22636.79
18	679.10	7323.90	15312.90
19	459.39	7543.61	7769.28
20	233.08	7769.92	0.00