Question

Glade Company leases specialized computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease term, and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of

Answer 1

The concluding part of the question

Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

Answer:

$51,600

Step-by-step explanation:

Given that the total interest over the term amounts to the change between total lease payments and the fair value of the property at inception.

Hence, we have the following:

Let PV = annual rent x annuity due factor;

Hence, annual rent = PV / annuity due factor;

Then annual rent = $323,400 / 4.312 = $75,000;

Therefore, Gross investment = $75,000 per year x 5 years = $375,000;

Then, we have Interest revenue = gross investment – net investment = $375,000 – $323,400 = $51,600;

Hence, the total amount of interest revenue that Glade will earn over the life of the lease is $51,600.