Nichols Ltd manufactures specialised machinery for both sale and lease. On 1 July 2021, Nichols leased a machine to Pontine Ltd. The costs incurred by Nichols to set up the lease agreement were $1690. The machine cost Nichols Ltd $210 000 to manufacture, and its fair value at the inception of the lease was $232 890. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Pontine Ltd has guaranteed $22 000 of the asset's expected residual value of $40 000 at the end of the 5-year lease term. Pontine Ltd agreed to pay an annual lease payment of $55 000 with the first payment due at the end of the first year. The debit to the sales revenue account in Nichols' books is:

Question

Quizplus · Accepted Answer

To calculate the sales revenue, we need to find the present value of lease payments and the guaranteed residual value.

PV of lease payments = $55,000 x (PVIFA 10%, 4) + $22,000 x PVIF 10%, 4
= $55,000 x 3.169 + $22,000 x 0.683
= $174,797

PV of guaranteed residual value = $22,000 x PVIF 10%, 5
= $13,144

Total present value = $187,941

Sales revenue = Total present value + costs incurred
= $187,941 + $1,690
= $189,631

Therefore, the answer is C) $222,154.

Nichols Ltd Manufactures Specialised Machinery for Both Sale and Lease