Cary Corp. manufactures equipment for sale or lease. On December 31, 2020, Cary leased equipment to Grant Sales Inc. for five years, with ownership of the equipment being transferred to Grant at the end of the lease. Annual lease payments are $ 252,000 (including $ 12,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2020. Collectibility of the remaining lease payments is reasonably assured, and there are no additional costs (other than executory costs) to be incurred by Cary. The normal sales price of the equipment (fair value) is $ 924,000, and Cary's cost is $ 720,000. The present value of the lease payments is equal to the fair value of the equipment. For the year ended December 31, 2020, what amount of income should Cary report from this lease?

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Annual lease payments are $ 252,000, including $ 12,000 executory costs. Therefore, the amount of income that should Cary report from this lease for the year ended December 31, 2020, is $ 252,000 - $ 12,000 = $ 240,000. Since the present value of the lease payments is equal to the fair value of the equipment, there is no profit or loss on the sale, and the income recognized is the interest portion of the lease payments, which is $ 240,000 x 0.10 = $ 24,000. The income recognized in 2020 is $ 24,000 x 1/5 = $ 4,800. Therefore, the amount of income that Cary should report for the year ended December 31, 2020, is $ 240,000 - $ 4,800 = $ 204,000.

Cary Corp Manufactures Equipment for Sale or Lease