Question

6. Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $202,000. Manufacturers Southern's fiscal year ends December 31. (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 $16,700 at the beginning of each period Economic life of asset 2 years Fair value of asset $124,782 Implicit interest rate 10%

Required: 1. Show how International Machines determined the $16,700 quarterly lease payments. 2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2021, and the second lease payment on April 1, 2021.

7. Alvis Corporation reports pretax accounting income of $300,000, but due to a single temporary difference, taxable income is only $145,000. At the beginning of the year, no temporary differences existed. Required: 1. Assuming a tax rate of 25%, what will be Alvis’s net income? 2. What will Alvis report in the balance sheet pertaining to income taxes?

Answer 1

Solution

Manufacturers Southern

1. Computations for $16,700 quarterly lease payments:

Implicit interest rate – 8%

Quarterly rate = 10/4 = 2%

Present value of an annuity due factor of $1 for 8 periods (4quarters x 2 years) at 2% = 7.47199

Lease payments = 16,700 x 7.47199 = $124,782

2. Journal entries in the books of International Machines (Lessor):

Date	Account Titles and Explanation	Debit	Credit
1-Jan-21	Lease Receivable	$124,782
	Leased Equipment	$124,782
	(To record the inception of lease)
1-Jan-21	Cash	$16,700
	Lease Receivable	$16,700
	(To record receipt of first payment)
1-Apr-21	Cash	$16,700
	Interest Revenue	$2,162
	Lease Receivable	$14,538
	(To record interest revenue and lease receivable)

Computation of interest revenue on April 1:

Lease receivable at Jan 1 = 124,782

Less: cash received           16,700

Lease receivable at Apr 1 = 108,082

Interest expense at 2% = 2,162

Lease receivable = cash – interest revenue

= 16,700 – 2,162 = $14,538

Part 2 -
Alvis Corporation

1. Assuming a tax rate of 25%, determination of alvis’ net income:

Net income = pretax accounting income – income tax expense

Pretax accounting income = $300,000

Income tax expense at 25% = 75,000

Net income = $225,000

2. Income taxes to be reported in balance sheet –

Deferred tax liability = (pretax income – taxable income) x tax rate

= (300,000 – 145,000) x 25%

= $38,750

Deferred tax liability = $38,750

Income tax payable = income tax expense – deferred tax liability

= 75,000 – 38,750 = $36,250

Or = taxable income x tax rate

= 145,000 x 25% = 36,250