Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2013. The manufacturing cost of the computers was $17 million.
This non-cancelable lease had the following terms:

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Lease payments: $3,002,038 semiannually; first payment at January 1, 2013; remaining payments at June 30 and December 31 each year through June 30, 2017.

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Lease term: 5 years (10 semi-annual payments)

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No residual value; no bargain purchase option

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Economic life of equipment: 5 years

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Implicit interest rate and lessee's incremental borrowing rate: 9% semi-annually

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Fair value of the computers at January 1, 2013: $21 million

Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the interest revenue that Technoid would report on this lease in its 2013 income statement? (Round your answer to the nearest dollar.)
A) $0.
B) $3,115,234.
C) $1,579,821.
D)None of these is correct.

Answer 1

Answer:

b. $3,115,234

Explanation:

Opening Balance as on 01.01.2013                        $21,000,000

Less: Payment of First Instalment on 01.01.2013   $3,002,038

Net Balance as on 01.01.2013                                 $17,997,962

Add: Interest at 9% up to 30.06.2013                    $1,619,816

Less: Payment of 2nd instalment on 30.06.2013  $3,002,038

Balance as on 01.07.2013                                      $16,615,740

Interest at 9% up to 31.12.2013                                $1,495,417

Total interest revenue to be reported on the lease during the calendar year 2013 = $1,619,816 + $1,495,417 = $3,115,234