Question

Farm Co. leased equipment to Union Co. on January 1, 2021, 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 January 3, 2021. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 2021 income statement

Answer 1

$5,750

Step-by-step explanation:

For computing the interest revue first we have to determine the remaining amount which is shown below:

= Sale type lease of property - first eight annual lease payments

= $135,000 - $20,000

= $115,000

Now the interest revenue is

= Remaining amount × discounted rate × number of months ÷ total number of months in a year

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

= $5,750

The six months is calculated from June to December

We simply applied the above formula