Question

Eye Deal Optometry leased vision-testing equipment from Insight Machines on January 1, 2018. Insight Machines manufactured the equipment at a cost of $320,000 and lists a cash selling price of $437,424. Appropriate adjusting entries are made quarterly. (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 5 years (20 quarterly periods)
Quarterly lease payments $24,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset 5 years
Interest rate charged by the lessor 4%
Required:
1. Prepare appropriate entries for Eye Deal to record the arrangement at its beginning, January 1, 2018, and on March 31, 2018.
2. Prepare appropriate entries for Insight Machines to record the arrangement at its beginning, January 1, 2018, and on March 31, 2018.

Answer 1

Answer:

Eye Deal Optometry and Insight Machines

Journal Entries for Eye Deal:

Debit Right of Use Asset $437,424

Credit Lease Liability $437,424

To record the right of use asset and lease liability.

Debit Lease Liability $22,906.44

Debit Interest Expense $1,093.56

Credit Cash $24,000

To record the first lease payment and interest expense.

March 31, 2018:

Debit Lease Liability $22,843.71

Debit Interest Expense $1,156.29

Credit Cash $24,000

To record the second lease payment and interest expense.

Journal Entries for Insight:

January 1, 2018:

Debit Lease Receivable $437,424

Credit Lease Asset $437,424

To record the lease receivable and asset.

Debit Cash $24,000

Credit Lease Receivable $22,906.44

Credit Interest Revenue $1,093.56

To record the first lease receipt and interest revenue.

March 31, 2018:

Debit Cash $24,000

Credit Lease Receivable $22,843.71

Credit Interest Revenue $1,156.29

To record the second lease receipt and interest revenue.

Explanation:

a) Data and Calculations:

Cost of equipment = $320,000

Cash selling price (fair market value/PV) = $437,424

Lease term = 5 years (20 quarterly periods)

Quarterly lease payments = $24,000

Lease Schedule for the first year:

Period              PV                        PMT              Interest         FV

Jan. 1, 2018 $437,424.00 $24,000.00 $1,093.56 $462,517.56

Mar. 31            $462,517.56 $24,000.00 $1,156.29 $487,673.85

June 30          $487,673.85 $24,000.00 $1,219.18         $512,893.04

Sept. 30          $512,893.04 $24,000.00 $1,282.23 $538,175.27

Dec. 31            $538,416.17 $24,000.00 $1,406.04 $563,822.21