Answer:
a. No. of periods = 3 years * 2 = 6 semiannual periods
Interest = 8% / 2 = 4% per seminannual period
Payment was first made on the same day so this is an annuity due.
Present value of lease :
= Amount * Present value interest factor of annuity due, 6 periods, 4%
= 880,440 * 5.4518
= $4,799,983
b. Amount in balance sheet:
= Amount of liability remaining end of June + interest - lease payment received end of December
Amount of liability remaining end of June = 4,799,983 - 880,440
= $3,919,543
Interest = 3,919,543 * 4% = $156,782
= 3,919,543 + 156,782 - 880,440
= $3,195,885
c. Interest revenue in Income statement = $156,782
Pretax revenue reported in income statement = $4,799,983
Pretax COGS reported in income statement = $4,300,000 for manufacturing the equipment.
Pretax amount for lease:
= Revenue - COGS + Interest revenue
= 4,799,983 - 4,300,000 + 156,782
= $656,765
