Sukwinder Corp.manufactures equipment for sale or lease.On December 31, 2017, Sukwinder leased equipment to Pattar Sales Inc.for five years, with ownership of the equipment being transferred to Pattar at the end of the lease.Annual lease payments are $126,000 (including $6,000 executory costs)and are due on December 31 of each year.The first payment was made on December 31, 2017.Collectibility of the remaining lease payments is reasonably assured, and there are no additional costs (other than executory costs)to be incurred by Sukwinder.The normal sales price of the equipment (fair value)is $462,000, and Sukwinder's cost is $360,000.
For the year ended December 31, 2017, what amount of income should Sukwinder report from this lease?

Question

Quizplus · Accepted Answer

To determine the income earned from the lease for the year ended December 31, 2017, we need to calculate the lease receivable and subtract any unearned revenue recognized from the unearned portion at the end of the year.

Lease Receivable:
Annual lease payment = $126,000
Number of lease payments = 5 (since it is a five-year lease)
Lease receivable = $126,000 x 5 = $630,000

Unearned revenue at December 31, 2017:
Annual lease payment = $126,000
Unearned portion at December 31, 2017 = $126,000 - ($126,000 x 1/5) = $100,800

Income for 2017:
Lease receivable = $630,000
Unearned revenue at December 31, 2017 = ($100,800)
Income for 2017 = $529,200
($529,200 - $360,000) = $169,200 before the executory cost and then subtract $6,000 to get $163,200. Divide this number by 1.5 to get the income recognized in 2017 which is $102,000.