Hazard Inc. manufactures equipment that is sold or leased. On December 31, 2008,

Question

Hazard Inc. manufactures equipment that is sold or leased. On December 31, 2008, Hazard leasedequipment to Robards for a five-year period expiring December 31, 2013, at which date ownership ofthe leased asset will be transferred to Robards. Equal $40,000 payments under the lease are due onDecember 31 of each year. The first payment was made on December 31, 2008. Collectibility of theremaining lease payments is reasonably assured, and Hazard has no material cost uncertainties. Thenormal sales price of the equipment is $154,000 and cost is $120,000. For the year ended December31, 2008, how much income should Hazard recognize from the lease transaction?a.$46,000b.$40,000c.$34,000d.$28,000

Explanation / Answer

Equal $40,000 payments under the lease are due onDecember 31 of each year.

The first payment was made on December 31, 2008.

The normal sales price of the equipment is $154,000 and cost is $120,000.

Total lease paid by hazard till Dec 31, 2013 = $40,000*5 = $200,000.

Income that should be recognize from the lease transaction is $46,000 ($200,000 - $154,000)

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