Question

Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $99,000. Manufacturers Southern's fiscal year ends December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Related Information: Lease term 2 years (8 quarterly periods) Quarterly rental payments $16,700 at the beginning of each period Economic life of asset 2 years Fair value of asset $126,890 Implicit interest rate 6% Required: 1. Show how International Machines determined the $16,700 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.

Answer 1

The 16,700 are the PMT of an annuity-due considering the fair value of 126,890

lease receivable 126,890 debit

Equipment 126,890 credit

--lease to Manufacturers Southern--

cash 16,700 debit

lease receivable 16,700 credit

--first lease payment--

cash 16,700 debit

interest revenues 6,611.4 credit

lease receivable 10,088.6 credit

--second lease payment--

Step-by-step explanation:

The 16,700 are the PMT of an annuity-due considering the fair value of 126,890

`PV / (1-(1+r)^(-time) )/(rate) = C\\`

PV $ 126,890

time: 8 quarters

rate: 0.015 (6% annual over 4 quarter per year)

`126890 / (1-(1+0.015)^(-8) )/(0.015) = C\\`

C $ 16,699.977

The first payment as s done right away, has no interest and decreases entirely the lease receivable

The second payment will accrue interest:

carrying value x 6% interest expense =

(126,890 - 16,700) x 6% = 6,611.4‬

Amortization on lease receivable: 16,700 - 6,611.4 = 10,088.6‬