Question

Swifty Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $445,217, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $13,500. The hospital will pay rents of $65,100 at the beginning of each year and all maintenance, insurance, and taxes. Swifty Inc. incurred costs of $274,000 in manufacturing the machine and $13,600 in negotiating and closing the lease. Swifty Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

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Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

(1)		Lease receivable at inception of the lease		$
(2)		Sales price		$
(3)		Cost of sales		$

eTextbook and Media

List of Accounts

Prepare a 10-year lease amortization schedule. (Round answers to 0 decimal places e.g. 58,971.)

SWIFTY INC. (Lessor) Lease Amortization Schedule (Annuity due basis, guaranteed residual value)
Beginning of Year		Annual Lease Payment Plus Residual Value		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
Initial PV		$		$		$		$
1
2
3
4
5
6
7
8
9
10
End of 10
		$		$		$

eTextbook and Media

List of Accounts

Prepare all of the lessor’s journal entries for the first year. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)

No.	Account Titles and Explanation	Debit	Credit
1.
	(To record the lease.)
	(To record the incurrence of initial direct costs relating to the lease.)
2.
	(To record receipt of the first lease payment.)
3.
	(To record interest earned during the first year of the lease.)

Answer 1

a)

Present Value table
Year	Cash flows	PVF @ 10%	PV cash flows
0	78700*	1.0000	$         78,700
1	65100	0.9091	$         59,182
2	65100	0.8264	$         53,802
3	65100	0.7513	$         48,911
4	65100	0.6830	$         44,464
5	65100	0.6209	$         40,422
6	65100	0.5645	$         36,747
7	65100	0.5132	$         33,407
8	65100	0.4665	$         30,370
9	65100	0.4241	$         27,609
10	13500 (GRV)	0.3855	$            5,205
			$       458,817

* 65100+13600(initial direct costs)

Lease receivable at the inception of lease	= Net Investment in Lease
	= (PV of ALP + PV of GRV) +PV of URV + PV of Initial direct costs
	$    458,817

b) Sales price = $445,217

c) Cost of Sales = $274,000 + $13,600 = $ 287,000

Unearned Finance Income	Gross investment - Net investment
Gross investment in lease	=65100*10+13500+13600
	678100
Unearned Finance Income	Gross investment - Net investment
	=678100-458817
	219283

SWIFTY INC. (Lessor)
Lease Amortization Schedule
(Annuity due basis, guaranteed residual value)
Beginning	Annual Lease Payment	Interest on	Recovery of Lease	Lease	Opening
of Year	Plus Residual Value	Lease Receivable	Receivable	Receivable	445217
0	65100	0	65100	380117
1	65100	38012	27088	353029
2	65100	35303	29797	323232
3	65100	32323	32777	290455
4	65100	29046	36054	254401
5	65100	25440	39660	214741
6	65100	21474	43626	171115
7	65100	17111	47989	123126
8	65100	12313	52787	70339
9	65100	7034	58066	12273
10	13500	1227	12273	0