[rmm77]

Farm Co. leased equipment to Union Co. on July 1, 20X1, 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 was received and recorded on July 3, 20X1. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 20X1 income statement?

Incorrect A.

$0

B.

$5,500

C.

$5,750

D.

$6,750

Why is the correct answer C? isn’t it interest payable since the payment isnt due till next year?

FAR-74,92
BEC-85
AUD-8/8
REG-83

[Anonymous]

Farm Co is the lessor. Even though it isn't paid until July of next year, Farm Co still needs to accrue for the interest income they will receive.

The first payment will reduce the principle because interest has not started to accrue:

135,000 – 20,000 = 115,000

Calculate the interest that will be owed for the 6 months of 2001:

115,000 * 10% = 11,500 interest for a full year
11,500 * 6/12 = 5,750 6 months of interest (July thru December)

Does that help?

[rmm77]

Yeah, I assumed Farm was the lessee instead of teh lessor. Thanks!

FAR-74,92
BEC-85
AUD-8/8
REG-83

[Author]

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