Question

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2018. Edison purchased the equipment from International Machines at a cost of $117,772.

Related Information:
Lease term	2 years (8 quarterly periods)
Quarterly rental payments	$15,500 at the beginning of each period
Economic life of asset	2 years
Fair value of asset	$117,772
Implicit interest rate	6%
(Also lessee’s incremental borrowing rate)

Prepare a lease amortization schedule for the term of the lease for Manufacturers Southern from the beginning of the lease through January 1, 2019. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis. (Enter your answers in whole dollars and not in millions. Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.)

Record the appropriate entries for Manufacturers Southern from the beginning of the lease through January 1, 2019. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in millions. Round your intermediate and final answers to nearest whole dollar.)

Answer 1

Solution

Manufacturers Southern

1. Lease Amortization Schedule

	Lease Amortization Schedule
Date	Rental Payments	Effective Interest (6%/4 quarters = 1.5%)	Amortization Expense	Carrying Value
1/1/2018	$15,500			$117,772
1/1/2018	$15,500		$15,500	$102,272
4/1/2018	$15,500	1,534	$13,966	$88,306
7/1/2018	$15,500	$1,325	$14,175	$74,131
10/1/2018	$15,500	$1,112	$14,388	$59,743
1/1/2019	$15,500	$896	$14,604	$45,139
4/1/2019	$15,500	$677	$14,823	$30,316
7/1/2019	$15,500	$455	$15,045	$15,271
10/1/2019	$15,500	$229	$15,271	$0

1. Entries in the books of Manufacturers Southern:

Date	Account Title and Explanation		Debit	Credit
1/1/2018	Leased Equipment		$117,772
	Lease Liability			$117,772
	(To record beginning of the lease)
1-Apr-18	Interest Expense		$1,534
	Lease Rent		$13,966
	Cash			$15,500
	(To record interest expense and lease rent payments)
7-Apr-18	Interest Expense		$1,325
	Lease Rent		$14,175
	Cash			$15,500
	(To record payment of lease rental and interest expense)
1-Oct-18	Interest Expense		$1,112
	Lease Rent		$14,388
	Cash			$15,500
	(To record payment of lease rental and interest expense)
31-Dec-18	Depreciation Expense		$58,886
	Accumulated Depreciation			$58,886
	(To record depreciation expense on straight line basis, $117,772/2years = $58,886)
1-Jan-19	Interest Expense		$896
	Lease Payable		$14,604
	Cash			$15,500
	(To record lease payment and interest expense)