Slice Company manufactures equipment that they sell or lease. On December 31, 2011, Slice leased equipment to Hook Company for a five-year period after which ownership of the leased asset will be transferred to Hook. The lease calls for equal annual payments of $50,000, due on December 31 of each year. The first payment was made on December 31, 2011. The normal sales price of the equipment is $220,000, and cost is $176,000. For the year ended December 31, 2011, what amount of income should Slice report from the lease transaction?

Question

Quizplus · Accepted Answer

To calculate the income from the lease transaction for the year ended December 31, 2011, we need to determine the amount of interest income and the amount of sales-type lease income.

The interest income for the first year can be calculated as:
Interest = (Lease Receivable x Interest Rate) = ($220,000 x 12%) = $26,400

The sales-type lease income can be calculated as:
Sales-type Lease Income = Gross Profit + Interest Income
Gross Profit = Sales Price - Cost = $220,000 - $176,000 = $44,000
Sales-type Lease Income = $44,000 + $26,400 = $70,400

However, we have to consider that the first lease payment of $50,000 was received on December 31, 2011. Therefore, only a portion of the interest income is earned in 2011, and the remaining will be earned in subsequent years. We need to prorate the interest income for the portion of the year that Slice owned the asset.

Interest Income for 2011 = ($220,000 x 12% x 1/12) = $2,200
Sales-type Lease Income for 2011 = Gross Profit + Interest Income for 2011
Sales-type Lease Income for 2011 = $44,000 + $2,200 = $46,200

Therefore, the amount of income that Slice should report from the lease transaction for the year ended December 31, 2011, is $44,000 (sales-type lease income for 2011). The correct answer is C.

Slice Company Manufactures Equipment That They Sell or Lease