[Anonymous]

Howe Co. leased equipment to Kew Corp. on January 2, Year 1, for an eight-year period expiring December 31, Year 8. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, Year 1. The list selling price of the equipment is $3,520,000 and its carrying cost on Howe’s books is $2,800,000. The lease is appropriately accounted for as a sales-type (finance) lease. The present value of the lease payments at an imputed interest rate of 12% (Howe’s incremental borrowing rate) is $3,300,000. What amount of profit on the sale should Howe report for the year ended December 31, Year 1?
a. $500,000 b. $0 c. $90,000 d. $720,000
Explanation
Choice “a” is correct. The excess of the present value of the selling price over its cost is recorded as profit.
Present value of payments $ 3,300,000
Carrying cost (2,800,000)
Profit on sale $ 500,000

My question: Becker’s lecture stated sales (finance) lease should include two profits (Gain on Sale & interest income on the sale). Where is the interest income in this answer?? THANK YOU.

 

 

[Last chance]

#21 #22 are different because in #21 they didnt provide you the present value of payment so you use the selling price to compute.

#22 give you the pv of payments. Therefore u use that. Sp is not always the best one to use because they list price and u can buy it for less price.

But i'm confused on wording.. They say pv of payments is the representative of its FV… which makes sense.. But.. When u do bonds problems, pv is not fv. They are different 🙁

[ColoradoCPA]

Bond problems are easier for me than lease problems. I have to work on lease m/cs more. It takes time to understand. Good luck to you, December4th!!! 🙂

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[ColoradoCPA]

Bond problems are easier for me than lease problems. I have to work on lease m/cs more. It takes time to understand. Good luck to you, December4th!!! 🙂

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[Last chance]

Thank you! You too!!!

[Last chance]

Thank you! You too!!!

[Whopper Warrior]

JE #21

(January 2nd)

(dr). Lease Receivable 3,300,000

(cr,) Sales 3,300,000

(dr.) COGS 2,800,000

(cr), Inventory 2,800,000

(dr) Cash 600,000

(cr) Lease Receivable 600,000

(Decmeber 31 Y2)

Intrest Receivable ((3,300,000 – 600,000) * .12) 324,000

Intrest Revenue 324,000

(January 1st Y2)

Dr. Cash 600,000

Cr. Intrest Receivable 324,000

Cr. Lease Receivable 276,000

#22 would follow a simmilar pattern. Try to use PV if given, if not use the assumed FMV. Personally both questions are piss poor because their PV do not tie to thier rates.

Example #21 in excel use the formula: =PV(0.12,8,600000,0,1) and you get 3,338 k

Example #22, is a little closer at 3,521k

I guess it is more based on theory; which it looks like you have.

@December 4 – Can you elaborate when the PV of a bond does not equal its FV (I assume you mean Fair Market Value and not Future Value) on the day of issue?

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

JE #21

(January 2nd)

(dr). Lease Receivable 3,300,000

(cr,) Sales 3,300,000

(dr.) COGS 2,800,000

(cr), Inventory 2,800,000

(dr) Cash 600,000

(cr) Lease Receivable 600,000

(Decmeber 31 Y2)

Intrest Receivable ((3,300,000 – 600,000) * .12) 324,000

Intrest Revenue 324,000

(January 1st Y2)

Dr. Cash 600,000

Cr. Intrest Receivable 324,000

Cr. Lease Receivable 276,000

#22 would follow a simmilar pattern. Try to use PV if given, if not use the assumed FMV. Personally both questions are piss poor because their PV do not tie to thier rates.

Example #21 in excel use the formula: =PV(0.12,8,600000,0,1) and you get 3,338 k

Example #22, is a little closer at 3,521k

I guess it is more based on theory; which it looks like you have.

@December 4 – Can you elaborate when the PV of a bond does not equal its FV (I assume you mean Fair Market Value and not Future Value) on the day of issue?

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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