Aerotech Inc., a dealer in machinery and equipment, leased equipment to Quality

Question

Aerotech Inc., a dealer in machinery and equipment, leased equipment to Quality Products on July 1,2008. The lease is appropriately accounted for as a sale by Aerotech and as a purchase by Quality. Thelease is for a ten-year period (the useful life of the asset) expiring June 30, 2018. The first of ten equalannual payments of $250,000 was made on July 1, 2008. Aerotech had purchased the equipment for$1,337,500 on January 1, 2008, and established a list selling price of $1,687,500 on the equipment. As-sume that the present value at July 1, 2008, of the rent payments over the lease term discounted at 12percent (the appropriate interest rate) was $1,582,500. What is the amount of profit on the sale and theamount of interest income that Aerotech should record for the year ended December 31, 2008?

Explanation / Answer

Solution:

Profit on the Sale of Asset:

Jan-1-2008 Purchased Assset Value = $ 13,37,500

Less: 10 Equiannual Payment for Usage = $ 2,50,000

   Asset Value = $ 10,08,500

   Sale of Asset Value = $ 16,87,500

Profit On Sale of Asset = $ 6,79,000

(B). Asset Value = $ 15,82,500

   Less: Interest at 12% = $ 1,8,900

After Paid Interest = $ 13,92,600

  Less: Purchased Value = $ 13,37,500

Interest Amount = $ 55,100

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