Question

On January 1, 2020, Commonwealth Inc. leases equipment to Tap Inc. The equipment has a fair value of $156,000, a carrying value of $80,000, an economic life of four years, and a lease term of three years. Commonwealth's incremental borrowing rate is 10% and there is a purchase option at the end of the lease of $10,000 that is reasonably expected to be executed by Tap at that time. The annual lease payment is $33,809.39, with the first payment due immediately on January 1, 2020. What is the amount of interest revenue recognized in 2020 by Commonwealth Inc.

Answer 1

Answer: $12,219

Explanation:

Interest revenue for 2020:

= Carrying value * Borrowing rate

Carrying value at end of 2020:

= Fair value - Lease payment

= 156,000 - 33,809.39

= $‭122,190.61‬

Interest = 10% * 122,190.61

= $12,219