Regina
Corporation, which uses private enterprise GAAP, manufactures replicators. On
May 29, 2011, it leased to Barnes Limited a replicator that cost $265,000 to
manufacture and usually sells for $410,000. The lease agreement covers the
replicator’s five-year useful life and requires five equal annual rentals of
$95,930 each, beginning May 29, 2011. The equipment reverts to Regina at the
end of the lease, at which time it is expected that the replicator will have a
residual value of $40,000, which has been guaranteed by Barnes, the lessee. An
interest rate of 12% is implicit in the lease agreement. Collectibility of the
rentals is reasonably assured, and there are no important uncertainties
concerning costs.
Prepare
Regina’s May 29, 2011 journal entries.
Lease Payments Receivable............... 519,650
Sales............................... 410,000
Unearned
Interest Income—Leases..... 109,650
[(95,930 X 4.03735) + (40,000 X .56743)] = 410,000
(95,930 X 5) + 40,000 = 519,650
Payments are assumed to be at the beginning of each
year
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Excel formula =PV(rate,nper,pmt,fv,type)
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Using a financial calculator:
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PV
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$
?
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Yields $(410,000)
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I
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12%
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N
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5
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PMT
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$ 95,930
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FV
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$ 40,000
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Type
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1
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Cost of Goods Sold...................... 265,000
Inventory........................... 265,000
Cash.................................... 95,930
Lease
Payments Receivable........... 95,930
