Manufacturers Southern leased high-tech electronic equipment from International

Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $105,000. Manufacturers Southern's fiscal year ends December 31. (FV of S1, PV of S1. EVA.of S1. PVA of S1, FVAD of S1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Related Information Lease term Quarterly rental payments Economic life of asset Fair value of asse Implicit interest rate 2 years (8 quarterly periods) $17,000 at the beginning of each perlod 2 years $127,024 Required 1. Show how International Machines determined the $17,000 quarterly lease payments. 2. Prepare appropriate entries for International Machines to record the lease at its beginning, January 1, 2018, and the second lease payment on April 1, 2018

Explanation / Answer

1) No. of Quarterly periods = 2 years*4 quarters in a year = 8

Quarterly Implicit interest rate = 8%/4 = 2%

Present Value Annuity factor for the payment at the beginning = 1.00+PVAF(2%, 7)

= 1.00+6.47199107 = 7.47199107

Quarterly payments = Fair Value of Asset/PVAF

= $127,024/7.47199107 = $17,000 per quarter

2) Journal Entries (Amounts in $)

No. Date General Journal Debit Credit 1 Jan. 1, 2018 Lease Receivable 127,024 Cost of goods sold 105,000 Equipment 105,000 Sales Revenue 127,024 2 Jan. 1, 2018 Cash 17,000 Lease Receivable 17,000 3 Apr 1, 2018 Cash 17,000 Interest Income ($127,024-$17,000)*2% 2,200 Lease Receivable ($17,000 - $2,200) 14,800

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