Pharoah Company leased machinery to Stine Company on July 1, 2018, for a 10-year

Question

Pharoah Company leased machinery to Stine Company on July 1, 2018, for a 10-year period expiring June 30, 2028. Equal annual payments under the lease are $242000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest used by Pharoah and Stine is 9%. The cash selling price of the machinery is $1670000 and the cost of the machinery on Pharoah’s accounting records was $1470000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pharoah, what amount of interest revenue would Pharoah record for the year ended December 31, 2018?

$0 $128520 $150300 $64260

Explanation / Answer

1) Answer (D) $64,260

Calculation :

Amount of cash sale price = $1,670,000

First installment without interest = $242,000

Outstanding balance for interest calculation = $1,670,000 - $242,000

= $1,428,000

Interest revenue for the year ended Dec 31,20X8 = $1,428,000 * 9% * 6/12

= $64,260

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