Question

Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $330,000. The chronometers have a fair value of $429,000. 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	$24,002 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	$18,525
Interest rate charged by the lessor	8%

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)

No.	Date	Particulars	Debit	Credit
1	January 01, 2018	Right-of-use asset	400,316
		Lease payable		400,316
2	January 01,2018	Lease payable	24,002
		Cash		24,002
3	March 31,2018	Interest expense (2%*(400,316-24,002))	7,526
		Lease payable (balancing figure)	16,476
		Cash		24,002
4	March 31,2018	Amortization expense (400,316/20)	20,016
		Right-of-use asset		20,016

Present Value of Lease Payments: 24,002*PVIFA(2%,20) = 24,002*16.67846 = 400,316

2)

No.	Date	Particulars	Debit	Credit
1	January 01, 2018	Lease receivable	412,783
		Cost of goods sold (330,000-12,467)	317,533
		Sales revenue		400,316
		Inventory		330,000
2	January 01,2018	Cash	24,002
		Lease receivable		24,002
3	March 31,2018	Cash	24,002
		Lease receivable (balancing figure)		16,226
		Interest revenue (2%*(412,783-24,002))		7,776

PV(2%, 20) = 0.67297

(400,316+18,525*PV(2%, 20) = 400,316+(18,525*0.67297) = 412,783

(18,525*0.67297) = 12,467

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