Riverbed Company, a machinery dealer, leased a machine to Dexter Corporation on

Question

Riverbed Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $37,565 at the beginning of each year. The first payment is received on January 1, 2017. Riverbed had purchased the machine during 2016 for $171,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Riverbed, Riverbed set the annual rental to ensure an 12% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Riverbed at the termination of the lease Click here to view factor tables 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 o decimal places e.g. 58,971.) The amount of the lease receivable s

Explanation / Answer

Riverbed Company

Lease receivable = annual payments x present value of annuity due

Present value of an Annuity due of 1$ for 8 years at 12% = 5.56376

Lease receivable = $37,565 x 5.56376 = $209,003

Date

Account Titles and Explanation

Debit

Credit

1-Jan

Lease Receivable

$209,003

Cost of goods sold

$171,000

Sales Revenue

$209,003

Inventory

$171,000

(To record lease )

1/1/2017

Cash

$37,565

Lease Receivable

$37,565

(To record the first lease payment)

12/31/2017

Interest Receivable

$25,080

Interest Revenue

$25,080

(To record interest revenue )

Lease receivable – initial payment = 209,003 – 37,565 = $171,438

Interest expense = $171,438 x 12% = $25,080

Date

Account Titles and Explanation

Debit

Credit

1-Jan

Lease Receivable

$209,003

Cost of goods sold

$171,000

Sales Revenue

$209,003

Inventory

$171,000

(To record lease )

1/1/2017

Cash

$37,565

Lease Receivable

$37,565

(To record the first lease payment)

12/31/2017

Interest Receivable

$25,080

Interest Revenue

$25,080

(To record interest revenue )

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