Greenway Company signs a six-year lease with Gearup Company that requires a payment of $32,256 at the beginning of each year. The fair value of the leased equipment is $148,531.70. The interest rate implicit in the lease is 12%. The equipment has an estimated residual value of $20,000 at the end of the agreement, and the lessee does not guarantee the residual amount. Which of the following amounts should Greenway Company record as interest income at the end of the first year of the lease?

Question

Quizplus · Accepted Answer

The interest income for the first year can be calculated by applying the interest rate to the fair value of the leased equipment at the beginning of the lease. The fair value is $148,531.70, and the interest rate is 12%. Therefore, the interest income for the first year is $148,531.70 * 12% = $17,823.80. However, since the lease payment of $32,256 is made at the beginning of the year, this payment reduces the outstanding amount immediately, resulting in the calculation of interest on the reduced balance. The correct calculation involves finding the difference between the lease payment and the interest calculated on the initial fair value, which then adjusts the balance on which future interest is calculated. The provided choices seem to misinterpret the calculation method, but based on the standard method of calculating interest income on a lease, it involves applying the interest rate to the outstanding lease balance, adjusting for payments made. Without the exact calculation provided in the choices, the correct approach involves understanding that interest income is recognized based on the outstanding balance of the lease receivable, which decreases over time as payments are made.

Greenway Company Signs a Six-Year Lease with Gearup Company That