ABC INC.leased equipment to XYZ on January 1,2013.The lease is for a 9-year period expiring January 1,2022.The first equal annual payment of $400,000 was made on January 1,2013.The cash selling price of the equipment is $2,347,500,which is equal to the present value of the lease payments at 10 percent.ABC INC.had purchased the equipment for $2,100,000.The lease is appropriately recorded as a sales-type lease by ABC INC.What amount of interest income should ABC INC.record in 2013 as a result of the lease?

Question

Quizplus · Accepted Answer

The interest income for 2013 is calculated on the net investment in the lease at the beginning of the year. The net investment is the present value of the lease payments, which is $2,347,500. The interest rate is 10%, so the interest income for 2013 is $2,347,500 * 10% = $234,750. However, since the first payment reduces the principal, the interest income is calculated on the remaining balance after the first payment: ($2,347,500 - $400,000) * 10% = $194,750.

ABC INCLeased Equipment to XYZ on January 1,2013