Question

On January 1, 2018, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $240,000 for the machine and is leasing it to Zone for $39,000 per year, an amount that will return 9% to Calloway. The present value of the lease payments is $240,000. The lease payments are due each January 1, beginning in 2018. What is the appropriate interest entry on December 31, 2018?

Answer 1

Answer:

Given that,

Calloway paid for the machine = $240,000

Machine leasing to zone = $39,000 per year

Rate of Return = 9%

Present value of the lease payments = $240,000

Therefore, the interest entry on December 31, 2018 is as follows:

Interest receivable A/c      Dr. $18,090

To interest revenue                               $18,090

(To record interest on December 31, 2018)

Workings:

Interest = [$240,000 - $39,000] × 9%

             = $18,090