On July 1, 2020, Justin Ltd., a dealer in machinery and equipment, leased equipment to Trudeau Inc. The lease is for ten years, and at the end of the lease period, title will pass to Trudeau. Justin requires ten equal annual payments of $ 62,100 on July 1 of each year, and Trudeau made the first payment on July 1, 2020. Justin had purchased the equipment for $ 390,000 on January 1, 2020, and established a selling price of $ 500,000 (which was fair value at July 1, 2020). Assume that, at July 1, 2020, the present value of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $ 450,000. The useful life of the equipment is 12 years. For the year ended December 31, 2020, what is the amount of gross profit and interest income that Justin should record regarding this lease?

Question

Quizplus · Accepted Answer

The gross profit for Justin Ltd. is calculated based on the difference between the present value of the lease payments and the cost of the equipment. The present value of the lease payments is $450,000, and the cost of the equipment is $390,000, resulting in a gross profit of $60,000. The interest income is calculated as the interest portion of the lease payment. Given the present value of the lease payments is $450,000 and the interest rate is 8%, the interest income for the first year is calculated as $450,000 * 8% = $36,000. However, since the first payment is made at the beginning of the lease term, the interest income for the year would be calculated on the remaining balance after the first payment. The first payment of $62,100 includes both principal and interest, but since the question specifically asks for the interest income, and given the options provided, the closest match reflecting the calculation method described in the question is $15,516, which aligns with option B. This suggests there might be a misunderstanding in the calculation process described, but based on the options provided, B is selected due to the correct gross profit calculation.