Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on J

Question

Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on January 1, 2012. The lease is for an 8-year period and requires equal annual payments of $49,928 at the beginning of each year. The first payment is received on January 1, 2012. Wadkins had purchased the machine during 2011 for $170,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Wadkins. Wadkins set the annual rental to ensure an 10% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Wadkins at the termination of the lease. 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.) a. The amount of the lease receivable $ ___________________ b. Prepare all necessary journal entries for Wadkins for 2012.

Explanation / Answer

(b) Prepare all necessary journal entries for Wadkins for 2012.

(a) Compute the amount of the lease receivable. Using excel The present value of the lease receivable is = $292,998

(b) Prepare all necessary journal entries for Wadkins for 2012.

Jan 1, 12 Lease Receivable 292,998 Cost of Goods Sold 170,000 Sales Revenue 292,998 Inventory 170,000 Jan 1, 12 Cash 49,928 Lease Receivable 49,928 Dec 31, 12 Interest Receivable 24,307 Interest Revenue [($292,998 – $49,928) × 10.00%] 24,307

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