Pucci
Corporation, a machinery dealer whose stock trades on the Toronto Stock
Exchange, and so uses IFRS, leased a machine to Ernst Corporation on January 1,
2011. The lease is for a six-year period and requires equal annual payments of
$24,736 at the beginning of each year. The first payment is received on January
1, 2011. Pucci had purchased the machine during 2010 for $99,000. Collectibility
of lease payments is reasonably predictable, and no important uncertainties
exist about costs that have not yet been incurred by Pucci. Pucci set the annual
rental amount to ensure an 8% rate of return. The machine has an economic life
of six years, with no residual value, and reverts to Pucci at the termination
of the lease.
Instructions
(a)
Using time value of money tables, a financial calculator, or computer
spreadsheet functions, calculate the amount of each of the following:
1.
Gross investment
2.
Unearned interest income
3.
Net investment in the lease
(b)
Prepare all necessary journal entries for Pucci for 2011.
(a) (1) Calculation of gross investment:
$24,736
X 6 = $148,416
(2) Calculation of unearned interest income:
Gross
investment $148,416
Less: Fair market value of machine 123,500 *
Unearned
interest income $ 24,916
*$24,736
X 4.99271 (PV factor of annuity due at 8% for 6 periods)
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Excel formula =PV(rate,nper,pmt,fv,type)
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Using a financial calculator:
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PV
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$ ?
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Yields $123,499.68
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I
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8%
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N
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6
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PMT
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$ 24,736
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FV
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$
0
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Type
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1
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(3) Net investment in lease:
Lease
payments receivable $148,416
Less: Unearned interest income – leases 24,916
$123,500
(b)
1/1/11 Lease
Payments Receivable....... 148,416
Cost of
Goods Sold.............. 99,000
Sales...................... 123,500
Inventory.................. 99,000
Unearned
Interest Income—
Leases.................... 24,916
1/1/11 Cash ........................... 24,736
Lease
Payments Receivable.. 24,736
12/31/11 Unearned
Interest Income—
Leases.................... 7,901
Interest
Income............ 7,901
[($123,500 – $24,736) X .08]
