Question

Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 11% was $58,800. Ten annual lease payments of $9,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $52,000, and its retail fair value was $58,800.

What amount did Smith Co. record in its income statement for the reporting year ending December 31, 2021, in connection with the lease? (ignore taxes.)

Answer 1

Gain recognized

==> $58,800 - $52,000

==> $6,800

Interest Revenue

==>($58,000 - $9,000)5.5%

==> $2,695

The Amount to be recorded in Income Statement

==> Gain recognized + Interest Revenue

==> $6,800 + $2,695

The Amount to be recorded in Income Statement==>$9,495

Note: we used 5.5% because, we calculated interest revenue is for 6 months and the given annual rate is 11%.

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