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.)