Question

Pharoah Co. leased equipment to Union Co. on July 1, 2021, and properly recorded the sales-type lease at $133000, the present value of the lease payments discounted at 9%. The first of eight annual lease payments of $20000 due at the beginning of each year of the lease term was received and recorded on July 3, 2021. Pharoah had purchased the equipment for $114000. What amount of interest revenue from the lease should Pharoah report in its 2021 income statement?

Answer 1

$5,085

Step-by-step explanation:

Assets is leased on 9% per year interest, $20,000 lease payment include the interest income and the principal payment of the leased asset. We have to calculate the interest value first and the remainder is settled for the principal value.

Total Lease Value = $133,000

Advance lease payment on July 1, 2021 = $20,000

Amount Due on December 31, 2021 = $133,000 - $20,000 = $113,000

Only 6 month are passed after asset leased, 6 month of the interest revenue will be recognized on December 2021

Interest revenue recognized = $113,000 x 9% x 6/12 = $5,085