At the beginning of 2016, VHF Industries acquired a machine with a fair value of
ID: 2417474 • Letter: A
Question
At the beginning of 2016, VHF Industries acquired a machine with a fair value of $9,840,480 by signing a five-year lease. The lease is payable in five annual payments of $2.4 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
1- What is the effective rate of interest implicit in the agreement?
The implicit interest rate;___________
2- Prepare the lessee’s journal entries at the inception of the lease, the first lease payment at December 31, 2016 and the second lease payment at December 31, 2017.
a- 1/1/16 Record the lease
b- 12/31/16 Record the cash payment
c- 12/31/17 Record the cash payment
3- Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease, but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 6%. Prepare the lessee’s journal entry at the inception of the lease.
a- 1/1/16 Record the lease
Explanation / Answer
Solution:
(A). Implicit interest rate:
Interest rate = Amount Paid / Amount barrowed * 100
= 12,00,000 / 98,40,480 * 100
= 12.194%
Each annual Payment = 2,40,000 * 5 anuuals
= 12,00,000
(B). Journal treats
12/31/16 Record the cash payment
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