Question

Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight-year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018?1. $565,000 and $166,6002. $565,000 and $198,6003. $0 and $04. $0 and $166,600

Answer 1

Answer:

1. $565,000 and $166,600

Explanation:

In case of recording sale instead of lease the interest should be computed on Cash selling price instead of cost of the equipment .

Interest income = ($4,965,000 - $800,000)*8%*6/12

                          = $166,600

As $800,000 is due in July 1  

Profit = $4,965,000 - $4,400,000

         = $565,000

Therefore, The amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018 is $166,600  and $565,000.