At the beginning of 2018, VHF Industries acquired a machine with
a fair value of $7,989,010 by signing a three-year lease. The lease
is payable in three annual payments of $3.1 million at the end of
each year. (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.)
Required:
1. What is the effective rate of interest implicit
in the agreement?
2-4. Prepare the lessee’s journal entries at the
beginning of the lease, the first lease payment at December 31,
2018 and the second lease payment at December 31, 2019.
5. Suppose the fair value of the machine and the
lessor’s implicit rate were unknown at the time of the lease, but
that the lessee’s incremental borrowing rate of interest for notes
of similar risk was 7%. Prepare the lessee’s entry at the beginning
of the lease.
1)
The Implicit Interest Rate = 8% |
Explanation : |
Present value of annuity * $ 3,100,000 = $ 7,989,010 |
Present value of annuity = $ 7989010 / $ 3100000 |
Present value of annuity = 2.5771 |
The discount rate for 3 payments that can be equal |
to 2.57710 is 8 % |
2)
Date |
General Journal |
Debit |
Credit |
01-01-2018 |
Machine To Lease Payable (To record beginning of lease ) |
$ 7,989,010 |
$ 7,989,010 |
3)
Date |
Payment |
Interest(8%) |
Principal |
Balance |
01-01-2018 |
7989010 |
|||
12/31/2018 |
3100000 |
639121 (7989010*8%) |
2460879 (3100000-639121) |
5528131 |
12/31/2019 |
3100000 |
442250 (5528131*8%) |
2657750 (3100000-442250) |
2870381 |
12/31/2020 |
3100000 |
229619 (3100000-2870381) |
2870381 |
0 |
4)
Date |
General Journal |
Debit |
Credit |
12/31/2018 |
Lease Payable Interest Expense To Cash (To record first lease payment at December 31,2018) |
2460879 639121 |
3100000 |
12/31/2019 |
Lease Payable Interest Expense To Cash (To record lease payment at December 31,2019) |
2657750 442250 |
3100000 |
5)
Fair value of machine = $3, 100,000 * Cumulative PV Factor at 7% for 3 periods
= $3,100,000 * 2.624 = $ 8134400
Date |
General Journal |
Debit |
Credit |
01-01-2018 |
Machinery To Lease Payable (To record machinery purchased on lease) |
8134400 |
8134400 |
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