Question

Charles river hospital leased medical equipment from plymouth industries on january 1 2018. Plymounth industries manufactured the equipment at a cost of 600,000. the equipment has a fair value of 750,654. Appropriate adjusting entries are made quarterly.

Lease term 5 years (20 quarterly periods)

Quarterly lease payments 43,641 at Jan 1 2016, and at Mar 31, june 30, sept. 30, and Dec 31 thereafter.

Economic life of asset 6 years

residual value at end of lease term 33,684

interest rate charged by the lessor 8%

Required:

1. Prepare appropriate journal entries for charles river hospital to record the arrangement at its commencement, January 1,2016, and on march 31,2016.

2. Prepare appropriate journal entries for Plymouth Industries to record the arrangement at its commencement, January 1, 2016, and on March 31, 2016.

Answer 1

		Quarterly Lease payment period	20
		Amount of lease payment (beginning of period)	$43,641
		Annual interest=8%
		Quarterly interest rate=(8/4)=2%	0.02
		Present value of all lease payments	$727,865	(Using PV function of excel with Rate=0.02,Nper=20,Pmt=43641,Type=1
	1	JOURNAL ENTRIES CHARLES RIVER HOSPITAL
	Date	Account Title	Debit	Credit
	Jan 1, 2016	Leased Assets	$727,865
		Leased Liability		$727,865
		Leased Liability	$43,641
		Cash		$43,641
		(To record lease inception and lease payment)
	March 1, 2016	Lease liability	$29,957
		Interest expense	$             13,684		(727865-43641)*0.02
		Cash		$43,641
		(To record lease payment)
	2	JOURNAL ENTRIES -PLYMOUTH INDUSTRIES
	Date	Account Title	Debit	Credit
	Jan 1, 2016	Lease receivable	$727,865
		Asset		$727,865
		Cash	$43,641
		Lease receivable		$43,641
		(To record lease inception and lease amount received)
	March 1, 2016	Cash	$43,641
		Lease receivable		$29,957
		Finance Income		$ 13,684	(727865-43641)*0.03
		(To record receipt of lease payment)