Harter Company leased machinery to Stine Company on July 1, 2015, for a ten-year period expiring June 30, 2025. Equal annual payments under the lease are $150,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,050,000 and the cost of the machinery on Harter's accounting records was $930,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2015?

Question

Quizplus · Accepted Answer

For the year ended December 31, 2015, Harter would record interest revenue based on the outstanding lease receivable balance at the beginning of the year. Since the first payment was made on July 1, 2015, only six months of interest for the year 2015 would be recognized. The annual interest is calculated on the lease receivable (present value of future lease payments), which would be less than the cash selling price due to the initial payment reducing the balance. With a 9% annual interest rate, the interest for a full year would be more than $40,500, but since only half a year's interest is recognized in 2015, $40,500 is the correct amount for six months.

Harter Company Leased Machinery to Stine Company on July 1