Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July
2013, Nelson leased a machine to Poggi Ltd. The machine cost Nelson Ltd
$195 000 to manufacture, and its fair value at the inception of the lease was
$212 515. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Poggi Ltd has guaranteed $25 000 of the asset's expected residual value of $37 000 at the end of the 5-year lease term. The debit to the sales revenue account in Nelson's books is:

Question

Quizplus · Accepted Answer

The debit to the sales revenue account will be equal to the present value of the lease payments, which can be calculated using the interest rate implicit in the lease. The lease payments can be calculated as follows:

PV of lease payments = $212,515 - $25,000 (residual value guarantee)
PV of lease payments = $187,515

Using the interest rate implicit in the lease of 10%, the lease payments can be calculated as follows:

Lease payment = $187,515 / PVIFA(10%, 5)
Lease payment = $43,125

Therefore, the debit to the sales revenue account will be equal to the present value of the lease payments, which is $205,063 (i.e. $43,125 x PVIFA(10%, 5)). Thus, the correct answer is C).

Nelson Ltd Manufactures Specialised Machinery for Both Sale and Lease