Farm Co. leased equipment to Union Co. on July 1, Year 4, and properly recorded
ID: 2585174 • Letter: F
Question
Farm Co. leased equipment to Union Co. on July 1, Year 4, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year of the lease term was received and recorded on July 3, Year 4. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its Year 4 income statement? A. $6,750 B. $5,750 C. $5,500 D. $0 Farm Co. leased equipment to Union Co. on July 1, Year 4, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year of the lease term was received and recorded on July 3, Year 4. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its Year 4 income statement? A. $6,750 B. $5,750 C. $5,500 D. $0Explanation / Answer
SOLUTION: Option(B) is correct.
The first payment will reduce the principle because interest has not started to accrue
= $135,000 - $20,000 = $115,000
Computation of interest that will be owned for 6 months:
Interest revenue for full year = $115,000*10% = $11,500
Therefore, the amount of interest revenue from the lease is = 11500*6/12 = $5,750 (from july to december)
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