Harter Company leased machinery to Stine Company on July 1, 2015, for a ten-year

Question

Harter Company leased machinery to Stine Company on July 1, 2015, for a ten-year period expiring June 30, 2025. Equal annual payments under the lease are $150,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,050,000 and the cost of the machinery on Harter’s accounting records was $930,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2015?

$94,500

$81,000

$40,500

$0

Explanation / Answer

Calculation of interest revenue that Harter would record for the year ended December 31, 2015:

Lease start date is July 1 , 2015

2015 Year end date is Dec. 31, 2015

Hence interest Period = 6 Months

Cash selling price of the machinery is $1,050,000

Less: First installment paid on July 1, 2015 = 150000

Hence Outstanding balance = 1050000-150000 = $900000

And Interest rate is 9%

Hence interest revenue that Harter would record for the year ended December 31, 2015

= 900000*9%*6/12

= $40500

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