Metlock Company, a machinery dealer, leased a machine to Dexter Corporation on J
ID: 2586361 • Letter: M
Question
Metlock Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $37,114 at the beginning of each year. The first payment is received on January 1, 2017. Metlock had purchased the machine during 2016 for $165,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Metlock. Metlock set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Metlock at the termination of the lease.
Compute the amount of the lease receivable.
Prepare all necessary journal entries for Metlock for 2017.
Explanation / Answer
Amount of the lease receivable (present value of annuity due) = Annual payment / rate of return * [1 - 1/(1+rate of return)time] * (1+rate of return)
= 37,114 / 0.11 * [1 - 1/(1+0.11)8] * (1+0.11)
= 337400 * [1 - 1/2.304538] * 1.11
= $212002
journal entries for Metlock for 2017 :
December 31, 2017
To interest revenue
[($212002 - 37114)*11%]
Date Accounts title Dr. Cr. January 1, 2017 lease receivable 212002 cost of goods sold 165,000 To Inventory 165,000 To sale 212002 [Being machinery leased to Dexter corporation] January 1, 2017 Cash 37,114 To lease receivable 37,114 [Being anuual payment recevied on 1 Jan.]December 31, 2017
Interest receivable 19238To interest revenue
[($212002 - 37114)*11%]
19238 [Being interest earned on leased machinery]