Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Com

Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $19 million. This non-cancelable lease had the following terms: Lease payments: $3,173,776 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020. Lease term: 5 years (10 semi-annual payments). No residual value; no bargain purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 8% semi-annually. Fair value of the computers at January 1, 2016: $23 million. Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. What is the interest revenue that Technoid would report on this lease in its 2016 income statement?

Explanation / Answer

Fair value on January 1 ,2016 = $23,000,000

Carrying value = Fair value + interest - Installment

Carrying value after 1st semi annual payment = $23,000,000 + 0 - $3,173,776 = $19,826,224

Interest till 30 june 2016= $19,826,224 * 8 % = $1,586,098

Carrying value on june 30 ,2016= $19,826,224 + 1,586,098 - 3,173,776 = $18,238,546

Interest from 1 july2016 to 31 december 2016 = $18,238,546 * 8% = $1,459,084

Total interest revenue for 2016 = $1,586,098 + $1,459,084 = $3,045,182

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