Question

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $37,042 and has a carrying amount on Precision's books of $25,189. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,300. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,300; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 77%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What amount of Sales Revenue is recorded at commencement of the lease?

Answer 1

$25711.08

Step-by-step explanation:

The amount of sales revenue to be recorded at the commencement of the lease is the present value of all cash flows receivable from the lease

The pv formula in excel can be to determine the present of the ending of the payments(totaling 3)

=pv(rate,nper,pmt,fv)

rate is 7% the rate implicit in the lease.

nper is 3 years

pmt is the yearly payment of $7000

fv is the future value of the lease,it is unknown

=pv(6%,3,7000,0)=$18711.08

Then we to add the $7000 received on day one

=$ 18711.08+$7000=$25711.08