Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. B
ID: 2521446 • Letter: N
Question
Newton Labs leased chronometers from Brookline Instruments on January 1, 2018. Brookline Instruments manufactured the chronometers at a cost of $140,000. The chronometers have a fair value of $182,000. Appropriate adjusting entries are made quarterly. Related Information: Lease term 5 years (20 quarterly periods) Quarterly lease payments $10,184 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. Economic life of asset 6 years Estimated residual value of chronometers at end of lease term $7,861 Interest rate charged by the lessor 12% Required: 1. Prepare appropriate entries for Newton Labs to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018. 2. Prepare appropriate entries for Brookline Instruments to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018.
Explanation / Answer
1) As the lease term is 5 years and economic life of asset is 6 years, the lease will be considered as financial lease because lease term is more than 75% of economic life (i.e. 75% of 6 years = 4.5 yrs).
Interest rate for each quarter = 12%/4 = 3%
No. of periods = 20 Quarters
Lease Liability = Present value of lease payments
= Lease Payments*PVAF(20, 3%) (at the beginning)
= ($10,184*15.323799) = $156,058
Journal Entries in the books of lessee (Newton) (Amounts in $)
2) Journal Entries in the books of lessor (Brookline) (Amounts in $)
Date General Journal Debit Credit Jan 1, 2018 Right of Use Asset 156,058 Lease Payable 156,058 (To record the lease liability) Jan 1, 2018 Lease Payable 10,184 Cash 10,184 (To record the first lease payment) Mar 31, 2018 Interest Expense [($156,058-$10,184)*3%] 4,376 Lease Payable ($10,184 - $4,376) 5,808 Cash 10,184 (To record the second lease payment)