The Orange Company sells computers. Orange leases computers to Berry Company on

Question

The Orange Company sells computers. Orange leases computers to Berry Company on June 30, 2013. The computers cost Orange Company $12 million to manufacture. The lease is non-cancelable and has the following terms.

*Lease Payments $2,466,754 Semiannually with the first payment due June 30,2013 and the remaing payments due   Dec. 31 and June 30 each year through Dec. 31 2018.

*Lease term is 5 years (10 payments)

*no residual value and no bargain purchase option

*Economic life of equipment is 5 years

*Implicit interest rate and lessee's incremental borrowing rate 10% per year

*Fair value of computers at June 30,2013 is $20 million

collectability of rental payments is reasonably assured, and there are no lessor costs yet to be incurred

Total interest revenue Orange would report on its year end December 31,2013 income statement relative to this lease is closest to

    A)$2,466,754

    B)$4,933,508

    C)$876,662

    D)$1,673,820

Explanation / Answer

Interest revenue reported by Orange for the year ended 31 December 2015 would be closest to $ 4,933,508 (twice the amount of the June lease of $2,466,754).

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