Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $96,000. 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	$16,500 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$125,370
Implicit interest rate	6%

Required:
1. Show how International Machines determined the $16,500 quarterly lease payments.
2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2018, and the second lease payment on April 1, 2018.

a. Record the lease.

b. Record cash received. (Jan 1)

c. Record cash received. (Apr 1)

Answer 1

1	Fair value of asset=$125370
	Interest per quarter=6/4=1.5%								Year	PV @1.5%
	Lease rental=Fair value of asset/P.V of interest per quarter for 8 years								0	1
	Lease rental=125370/7.598=16500								1	0.985222
	(Note that lease payment is at the beginning)								2	0.970662
	(So present value=1+P.V of interest per quarter for 7 years)								3	0.956317
									4	0.942184
2	Date	Account titles and explanation			Debit	Credit			5	0.92826
	2018								6	0.914542
	Jan 1.	Lease receivable			125370				7	0.901027
		Cost of goods sold			96000				Total	7.598214
		Inventory				96000
		Sales revenue				125370
		(To record the lease)
		Cash			16500
		Lease receivable				16500
		(To record cash received)
		Cash			16500
		Lease revenue		(125370-16500)*1.5%		1633
		Lease receivable				14867
		(To record cash received)