Question

Trans Company, a dealer in machinery and equipment, leased equipment to Dust, Inc., on July 1,
2018. The lease is appropriately accounted for as a sales-type lease by Trans and as a finance lease
by Dust. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The
first of 10 equal annual payments of €828,000 was made on July 1, 2018. Trans had purchased the
equipment for €5,250,000 on January 1, 2018, and established a list selling price of €7,200,000 on
the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease
term discounted at 8% (the appropriate interest rate) was €6,000,000.
What is the amount of profit on the sale and the amount of interest revenue that Trans should
record for the year ended December 31, 2018?

Answer 1

profit on sale= present value of rental payment less cost of equipment, rest explained in image.