Pearl Inc. was incorporated in 2019 to operate as a financial service firm, with an accounting fiscal year ending April 30. Pearl’s primary product is a sophisticated online investment management system; its customers pay a fixed fee plus a usage charge for using the system. Pearl has leased a large, GenX computer system from the manufacturer. The lease calls for a monthly rental of $19,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 14 years. All rentals are payable on the first day of the month beginning with April 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 GenX system. This lease is to be accounted for as a finance lease by Pearl, and the asset will be amortized by the straight-line method. Borrowed funds for this type of transaction would cost Pearl 6% per year (0.5% per month). Following is a schedule of the present value of an annuity due for selected periods discounted at 0.5% per period when payments are made at the beginning of each period.
Pearl Inc. was incorporated in 2019 to operate as a financial service firm, with an accounting fiscal year ending April 30. Pearl’s primary product is a sophisticated online investment management system; its customers pay a fixed fee plus a usage charge for using the system.
Pearl has leased a large, GenX computer system from the manufacturer. The lease calls for a monthly rental of $19,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 14 years.
All rentals are payable on the first day of the month beginning with April 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 GenX system.
This lease is to be accounted for as a finance lease by Pearl, and the asset will be amortized by the straight-line method. Borrowed funds for this type of transaction would cost Pearl 6% per year (0.5% per month). Following is a schedule of the present value of an annuity due for selected periods discounted at 0.5% per period when payments are made at the beginning of each period.
|
Periods
(months) |
Present Value of an Annuity Due
Discounted at 0.5% per Period |
||
|---|---|---|---|
|
1
|
1.000
|
||
|
2
|
1.995
|
||
|
3
|
2.985
|
||
|
143
|
102.497
|
||
|
144
|
102.987
|
Prepare all entries Pearl should make in its accounting records during April 2020 relating to this lease. Remember, April 30, 2020, is the end of Pearl’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
|
Date
|
Account Titles and Explanation
|
Debit
|
Credit
|
|---|---|---|---|
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choose a transaction date
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enter an account title to record the lease
|
enter a debit amount
|
enter a credit amount
|
|
enter an account title to record the lease
|
enter a debit amount
|
enter a credit amount
|
|
|
(To record the lease.)
|
|||
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choose a transaction date
|
enter an account title to record lease payment
|
enter a debit amount
|
enter a credit amount
|
|
enter an account title to record lease payment
|
enter a debit amount
|
enter a credit amount
|
|
|
(To record lease payment.)
|
|||
|
choose a transaction date
|
enter an account title to record interest
|
enter a debit amount
|
enter a credit amount
|
|
enter an account title to record interest
|
enter a debit amount
|
enter a credit amount
|
|
|
(To record interest.)
|
|||
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choose a transaction date
|
enter an account title to record amortization
|
enter a debit amount
|
enter a credit amount
|
|
enter an account title to record amortization
|
enter a debit amount
|
enter a credit amount
|
|
|
(To record amortization.)
|
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