Nelson Ltd manufactures specialised machinery for both sale and lease.On 1 July
2012,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 would be equal to the present value of the lease payments, which can be calculated using the interest rate implicit in the lease of 10%. Using this rate, the present value of the lease payments would be $230,063. However, since Poggi Ltd has guaranteed $25,000 of the residual value, this amount should be included in the calculation of the present value. Therefore, the debit to the sales revenue account would be $230,063 - $25,000 = $205,063.

Nelson Ltd Manufactures Specialised Machinery for Both Sale and Lease