Peters Company leased a machine from Johnson Corporation on January 1, 2018. The

Question

Peters Company leased a machine from Johnson Corporation on January 1, 2018. The machine has a fair value of $17,000,000. The lease agreement calls for three equal payments at the end of each year. The useful life of the machine was expected to be three years with no residual value. The appropriate interest rate for this lease is 12%. Other information: PV of an ordinary annuity @12% for 3 periods: 2.40183 PV of an annuity due @12% for 3 periods: 2.69005

Required

: 1. Determine the amount of each lease payment.

2. 3. & 4. Prepare the appropriate journal entry.

Explanation / Answer

1 Determine the amount of each lease payment Fair Value of machine/PV of an ordinary annuity 17000000/2.40183 7077936.407 2 Leased asset 17000000 To Lease Payable 17000000 3 Interest Expense 2040000 12%*17000000 Lease Payable 5037936 To Cash 7077936 4 Interest expense 1435448 12%*(17000000-5037936) Lease payable 5642489 To Cash 7077936

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