Question

Benedict Company leased equipment to Mark, Inc., on January 1, Year 2. The lease is for an 8-year period expiring December 31, Year 9. The first of 8 equal annual payments of $600,000 was made on January 1, Year 2. Benedict had purchased the equipment on December 29, Year 1, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that the present value at January 1, Year 2, of all rent payments over the lease term discounted at a 10% interest rate was $3,520,000. What amount of interest income should Benedict record in Year 3 (the second year of the lease period) as a result of the lease

Answer 1

$261,200

Step-by-step explanation:

The computation of the interest income for the year 3 is shown below:

DATE Annual payment Interest revenue Reduction Net investment

On Jan 1 $3,520,000

On Jan 1 $600,000 $0 $600,000 $2,920,000

On Jan 1, year 2 $600,000 $292,000 $308,000 $2,612,000

On jan1, year 3 $600,000 $261,200 $338,800 $2,273,200