Question

DeRozan Corp. manufactured equipment at a cost of $331,001 and leased it to B Corp. on January 1, 2019, for an eight-year period expiring December 31, 2026. The asset’s economic life is 10 years. Equal payments under the lease are $63,400 and are due on January 1 of each year. The first payment was made on January 1, 2019. The implicit rate used by Derozan is 8%.

Additional information:                                            

Present value of an annuity due of $1 for 8 periods at 8%          6.21                                      

Present value of an annuity due of $1 for 16 periods at 4%       12.12                                       

What is the amount of interest revenue Derozan will recognize for the year ended December 31, 2019?

Answer 1

Here ,Lease given to B Corp on 1st Jan 2019 for 8 years.

Here we need to calculate interest on 31st December 2019. Hence 1 year .

Payment on 1st Jan 2019 $63400,

First we will calculate the present value of equal installment as on 31st Dec 2019.

Formula for present value is = Cashflow /(1+r)ⁿ

Here Cashflow is $63,400 , r interest rate i.e. 8% or 0.08 and n =period i.e 1 year

Present value = $63,400/(1+0.08)¹ =$58,703

Hence Interest revenue on 31st Dec 2019 =($63,400-$58,703)=$4,696.30