Pucci Corporation, a machinery dealer whose stock trades on the Toronto Stock Exchange, and so uses IFRS, leased a machine to Ernst Corporation

Pucci Corporation, a machinery dealer whose stock trades on the Toronto Stock Exchange, and so uses IFRS, leased a machine to Ernst Corporation on January 1, 2011. The lease is for a six-year period and requires equal annual payments of $24,736 at the beginning of each year. The first payment is received on January 1, 2011. Pucci had purchased the machine during 2010 for $99,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties exist about costs that have not yet been incurred by Pucci. Pucci set the annual rental amount to ensure an 8% rate of return. The machine has an economic life of six years, with no residual value, and reverts to Pucci at the termination of the lease.

Instructions

(a) Using time value of money tables, a financial calculator, or computer spreadsheet functions, calculate the amount of each of the following:

1. Gross investment

2. Unearned interest income

3. Net investment in the lease

(b) Prepare all necessary journal entries for Pucci for 2011.

(a) (1) Calculation of gross investment:

            $24,736 X 6 = $148,416

    (2) Calculation of unearned interest income:

            Gross investment                     $148,416

            Less:  Fair market value of machine   123,500 *

                Unearned interest income         $ 24,916

*$24,736 X 4.99271 (PV factor of annuity due at 8% for 6 periods)

Excel formula =PV(rate,nper,pmt,fv,type)

Using a financial calculator:
PV	$  ?	Yields $123,499.68
I	8%
N	6
PMT	$ 24,736
FV	$  0
Type	1

    (3) Net investment in lease:

        Lease payments receivable                $148,416

        Less:  Unearned interest income – leases      24,916

                                                 $123,500

 (b)

1/1/11  Lease Payments Receivable....... 148,416

        Cost of Goods Sold.............. 99,000

             Sales......................          123,500

             Inventory..................           99,000

             Unearned Interest Income—

               Leases....................           24,916

1/1/11  Cash ...........................  24,736

              Lease Payments Receivable..           24,736

12/31/11 Unearned Interest Income—

               Leases....................  7,901

              Interest Income............            7,901

               [($123,500 – $24,736) X .08]