Question

Benedict Company leased equipment to Mark Inc. on January 1, 2017. The lease is for an eight-year period, expiring December 31, 2024. The first of eight equal annual payments of $600,000 was made on January 1, 2017. Benedict had purchased the equipment on December 29, 2016, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that at January 1, 2017, the present value of all rental payments over the lease term discounted at a 10% interest rate was $3,520,000. Required: What amount of interest income should Benedict record in 2018 (the second year of the lease period) as a result of the lease?

Answer 1

jan 2017 jan 2018 jan 2019 jan2020 jan2021 jan 2022 jan2023 jan2024

present value = 3520000 at jan 2017

at jan 2017 first installment did not consist of any interest , it is like a downpayment.

=600000*1+600000*.9091+600000*.8264+600000*.7513+600000*.683+600000*.6209+600000*.5645+600000*.5131

=3520980 is nearly to present value given above

2017

all rental payment =3520000

- sown payment =600000

balance payment 2920000

2018

balance payment 2920000

+interest@10% 292000

total 3212000

-installement 600000

balance amount 2612000

In 2018 interest income recorded by Benedict is $ 292000