IUB Inc. uses leases as a means of financing sales of its equipment. IUB leased

Question

IUB Inc. uses leases as a means of financing sales of its equipment. IUB leased a machine to Purdue Corp. for $15,000 per year, payable at the beginning of each year, for a 10-year period. The cost of the machine to IUB was $86,000. The fair value of the machine at the date of the lease was $100,000, equal to the present value of minimum lease payments. Assume a residual value of $0 at the end of the lease.

Give the entry required to record the lease on IUB’s books.

How much gross profit will IUB recognize initially on the lease? (Don’t include any interest revenue.)

How much interest revenue will IUB recognize in the first year?

Explanation / Answer

B) Gross Profit = Fair Value of Lease- Cost of Machine

= $100000- $86000= $14000

C): Total interest Over 10 Year will be= ( Annual Lease Rental*No. of Year)-First Lease rental PAyable at Begining- Fair VAlue

= $150000-$15000- $100000=$35000

Interest for First Year Will be ( $35000/10)= $3500

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