Question

Mayer Company leased equipment from Lennon Company on July 1, 2010, for an eight-year period expiring June 30, 2018. Equal annual payments under the lease are $300,000 and are due on July 1 of each year. The first payment was made on July 1, 2010. The rate of interest contemplated by Mayer and Lennon is 8%. The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Lennon's accounting records was $1,650,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Lennon, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2010

Answer 1

Answer:

c) $211,875 and $62,475

Explanation:

Options are "a)$0 and $0, b)$0 and $62,475, c) $211,875 and $62,475, d) $211,875 and $74,475"

Cash Selling Price                  $1,861,875

Less: Cost of the equipment $1,650,000

Profit on sale                           $211,875

Opening Lease Receivable Balance $1,861,875

Less: First installment received         $300,000

Lease Receivable Balance for           $1,561,875

interest computation

Interest expense up to Dec 31, 2010 = (1561875*8%*6/12) = $62,475