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

Answer 1

the amount of the interest revenue is $5,750

Step-by-step explanation:

The computation of the amount of the interest revenue is shown below:

The first payment will decrease the principal as the interest has not begins to accrue

= $135,000 - $20,000

= $115,000

Now the interest should be

= $115,000 × 10% × 6 months ÷ 12 months

= $5,750

Hence, the amount of the interest revenue is $5,750