Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2021. International Machines manufactured the equipment at a cost of $85,000. Manufacturers Southern's fiscal year ends December 31. Related Information: Lease ternm 2 years (8 quarterly periods)Quarterly rental payments $15,000 at the beginning of each periodEconomic life of asset 2 yearsFair value of asset $112,080Implicit interest rate 8% Required 1. Show how International Machines determined the $15,000 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.

1. The quarterly lease payments of $15,000 is calculated using the formula for calculating the present value (PV) of annuity due as shown below.

2. See the journal entries below.

Explanation:

1. Show how International Machines determined the $15,000 quarterly lease payments.

Since the quarterly rental payments of $15,000 are made at the beginning of each period, we use the formula for calculating the present value (PV) of annuity due given as follows:

FVA = P * [{1 - [1 ÷ (1 + r)]^n} ÷ r] * (1 + r) (1)

Where ;

FVA = Present value or fair value of asset = $112,080

P = quarterly lease payment = ?

r = implicit interest rate = 8% / 4 = 2%, or 0.02

n = number of quarters = 8

Substituting the values into equation (1) above, we have:

$112,080 = P * [{1 - [1 ÷ (1 + 0.02)]^8} ÷ 0.02] * (1 + 0.02)

$112,080 = P * 7.32548144049444 * (1.02)

$112,080 = P * 7.47199106930432

P = $112,080 / 7.47199106930432

P = $15,000

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.

Before doing this, the following are first calculated:

Lease revenue as on April 1, 2018 = ($112,080 - 15,000) * 2% = $1,942

Lease receivable as on April 1, 2018 = $15,000 - $1,942 = $13,058

The journal entries are therefore as follows:

Date        Particulars                           Dr ($)                 Cr ($)          

1 Jan 18   Lease Receivable              112,080                

               Cost of Goods Sold            85,000

               Inventory of Equipment                                85,000

               Sales Revenue                                              112,080

               Cash                                      15,000

               Lease Receivable                                          15,500

               (To record  the lease at its beginning.)                                  

1 Apr 18   Cash                                      15,000

               Lease Revenue                                                1,942

               Lease Receivable                                          13,058

               (To record the second lease payment.)                                

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