On January 1, 2001, Wishful Thinking, a lessor, entered into a direct-financing lease agreement with Lennard Company. The lease agreement required 6 equal annual payments of $50,000 at the end of each year. The leased property had an estimated residual value of $14,000, which was guaranteed by an unrelated third party. Wishful Thinking desired a 10% rate of return. What was the amount that Wishful Thinking recorded as interest revenue on the lease at the end of the year 2002?

Question

Quizplus · Accepted Answer

To calculate the interest revenue for Wishful Thinking at the end of the year 2002, we first need to determine the present value of the lease payments and the residual value, which is the amount recorded by Wishful Thinking at the inception of the lease. The lease payments are an annuity, so we use the formula for the present value of an annuity to calculate this. The formula is PVA = PMT * [(1 - (1 + r)^-n) / r], where PVA is the present value of the annuity, PMT is the annual payment ($50,000), r is the annual interest rate (10% or 0.10), and n is the number of periods (6 years). Additionally, we need to calculate the present value of the residual value, which is done using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($14,000), r is the annual interest rate (10% or 0.10), and n is the number of periods (6 years).After calculating the present value of the lease payments and the residual value, we sum these amounts to get the initial amount recorded for the lease. Then, to find the interest revenue for the end of the year 2002, we apply the interest rate (10%) to the outstanding balance of the lease at the beginning of 2002, which is the initial amount minus the first payment made at the end of 2001 (since payments are made at the end of each year, the first payment does not affect the balance for 2001).Given the complexity of the calculation and the need for specific financial formulas, the correct answer is determined by applying these principles and calculating the interest based on the outstanding lease balance at the beginning of 2002. The correct answer (B) $19,823.22, reflects the interest revenue recorded by Wishful Thinking at the end of the year 2002, calculated by applying the 10% interest rate to the outstanding lease balance after the first payment.

On January 1, 2001, Wishful Thinking, a Lessor, Entered into a Direct-Financing