Exercise 211 On January 1 2017 Pina Corporation signed a 5ye

Exercise 21-1 On January 1, 2017, Pina Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Pina to make annual payments of $8,482 at the beginning of each year, starting Jan machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The o the lessor at the end of the lease term. Pina uses the straight-line method of depreciation for all of its plant assets. machine reverts back | Pina\'s incremental borrowing rate is 9%, and the lessor\'s implicit rate is unknown. Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places e.g. 58,971.) The present value of the minimum lease payments SHOW LIST OF ACCOUNTS Prepare all necessary journal entries for Pina for this lease through January 1, 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select No Entry\" for the account titles and enter o for the amounts Round answers to o decimal places e.g 58,971.) Date Account Titles and Explanation Debit Credit

Solution

Here , for calculation of present value of minimum lease payments,

PV = Sum of [P/(1+r)^n] + [RV/(1+r)^n]

where,

Where PV = Present Value, P = Annual Lease Payments, r = Interest rate, n = number of years in the lease term and RV = residual value

Since , the annual payment is made on the begining of each year , value of \'n\' for each year = year -1.

i.e for 1st year , n= 1-1=0 , for 2nd year , n= 2-1 =1 and so on.

P = $ 8482 , useful life = 6 years , RV = $5,000 ( at the end of 6th year), r= 9%

PV = 8482/ (1.09)^0 + 8482/ (1.09)^1 +8482/ (1.09)^2+8482/ (1.09)^3+8482/ (1.09)^4+8482/ (1.09)^5 + 5000/ (1.09)^6

=$ 44455.36 = $ 44455.

PV = $ 44455.

Answer )

YEARLY depreciation = (Value - RV )/ year = (44455 - 5000)/6 = $6576.

ENTRY in books

Note : as lease payment is made in begining , so no interest has been charged for the year.

Date	Account entry and explanation	Debit	Credit
1/1/2017	Lease receivable	44,455
	Asset		44,455
	(to record the lease)
1/1/2017	Cash	8,482
	Lease receivable		8,482
	(to record the first payment)
31/12/2017	Depreciation	6576
	Depreciation Expense Account		6576
	(to record the depreciation)
31/12/2017	NO entry
	No entry
	(to record the interest)
1/1/2018	Cash	8,482
	Lease receivable		8,482
	(to record the second payment)