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.

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TomShelby TomShelby · Answer 1 · 2019-10-29T05:08:23+01:00

Answer:

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--

Explanation:

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

[tex]PV \div \frac{1-(1+r)^{-time} }{rate} = C\\[/tex]

PV $ 126,890

time: 8 quarters

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

[tex]126890 \div \frac{1-(1+0.015)^{-8} }{0.015} = C\\[/tex]

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