Answered: Metlock Inc. was incorporated in 2019…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Metlock Inc. was incorporated in 2019 to operate as a computer software service firm, with an accounting fiscal year ending August 31. Metlock’s primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.

Metlock has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $44,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.

All rentals are payable on the first day of the month beginning with August 1, 2020, the date the computer was installed and the lease agreement was signed. The lease is non-cancelable for its 12-year term, and it is secured only by the manufacturer’s chattel lien on the Alpha-3 system.

This lease is to be accounted for as a finance lease by Metlock, and it will be amortized by the straight-line method. Borrowed funds for this type of transaction would cost Metlock 6% per year (0.50% per month). Following is a schedule of the present value of an annuity due for selected periods discounted at 0.50% per period when payments are made at the beginning of each period.

Periods (months)		Present Value of an Annuity Due Discounted at 0.50% per Period
1		1.000
2		1.995
3		2.985
143		102.497
144		102.987

Prepare all entries Metlock should have made in its accounting records during August 2020 relating to this lease. Remember, August 31, 2020, is the end of Metlock’s fiscal accounting period, and it will be preparing financial statements on that date. Do not prepare closing entries. (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 0 for the amounts. Round answers to 0 decimal places, e.g. 125. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit


	(To record the lease.)


	(To record lease payment.)


	(To record interest.)


	(To record amortization.)

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