Question

Flounder Company, a machinery dealer, leased manufacturing equipment to Mays Corporation on January 1, 2017. The lease is for a 7-year period and requires equal annual payments of $25,349 at the beginning of each year. The first payment is received on January 1, 2017.

Flounder had purchased the machine during 2016 for $98,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Flounder. Flounder set the annual rental to ensure an 6% rate of return.

The machine has an economic life of 8 years with no residual value and reverts to Flounder at the termination of the lease.

A. Compute the amount of the lease receivable. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

B. Prepare all necessary journal entries for Flounder for 2017

Answer 1

A)Lease receivable =PVAD6%,7 *Lease payment

                 = 5.91732 * 25349

                = $ 149,998

B)

Date	Account title	Debit	credit
1	Lease receivable	149,998
	Manufacturing equipment		149,998
2	cash	25,349
	Lease receivable		25,349
3	Interest receivable	7479
	Interest income		7479
	[Being interest accrued for a year]

#Interest received = [Lease liability - Lease payment ]*Interest rate

                    = [149998- 25349]*6%

                    = 124649*6%

                   = 7478.94 (rounded to 7479)