Answer:
a. Prepare appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.
we must first determine the present value of the lease payments:
PV of lease payments = quarterly payment x annuity factor
- quarterly payment = $26,250
- PV annuity due factor, 2%, 20 periods = 16.67846
PV of lease payment = $26,250 x 16.67846 = $437,809.56 ≈ $437,810
January 1, 2021, equipment leased from Insight Machines
Dr Right of use asset 437,810
Cr Lease payable 437,810
January 1, 2021, first lease payment
Dr Lease payable 26,250
Cr Cash 26,250
March 31, 2021, second lease payment
Dr Lease payable 18,019
Dr Interest expense 8,231
Cr Cash 26,250
interest expense = ($437,810 - $26,250) x 2% = $8,231
March 31, 2021, amortization expense
Dr Amortization expense 21,891
Cr Right of use asset 21,891
amortization expense = $437,810 / 20 = $21,891
b. Prepare appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2021, and on March 31, 2021.
January 1, 2021, equipment leased to Eye Deal
Dr Lease receivable 437,810
Cr Lease revenue 437,810
Dr Cost of goods sold 350,000
Cr Equipment 350,000
January 1, 2021, first lease payment
Dr Cash 26,250
Cr lease receivable 26,250
March 31, 2021, second lease payment
Dr Cash 26,250
Cr Lease receivable 18,019
Cr Interest revenue 8,231
