Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 12% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What is the interest revenue that SuperByte will report on this lease in its current year income statement?
A) $1,626,340
B) $1,703,372
C) $1,887,983
D) $1,822,028

Question

Quizplus · Accepted Answer

The interest revenue is calculated based on the outstanding lease receivable balance. The initial lease receivable is the fair value of the equipment, $16,000,000. After the first payment of $1,493,617, the balance is $14,506,383. Interest for the first period is 6% of this balance, which is $870,383. After the second payment, the balance is $13,012,766, and interest for the second period is 6% of this, which is $833,989. The total interest revenue for the year is $870,383 + $833,989 = $1,703,372.

Superbyte Corporation Sells Photographic Equipment