Harter Company leased machinery to Stine Company on July 1, 2011, for a ten-year period expiring June 30, 2021.Equal annual payments under the lease are $75,000 and are due on July 1 of each year.The first payment was made on July 1, 2011.The rate of interest used by Harter and Stine is 9%.The cash selling price of the machinery is $525,000 and the cost of the machinery on Harter's accounting records was $465,000.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, 2011?

Question

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The interest revenue for the year ended December 31, 2011, is calculated on the outstanding lease receivable after the first payment. The lease receivable initially is the cash selling price of $525,000. After the first payment of $75,000 on July 1, 2011, the outstanding balance is $450,000. Interest for the six months from July 1 to December 31, 2011, is $450,000 * 9% * (6/12) = $20,250.

Harter Company Leased Machinery to Stine Company on July 1