Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2018;
remaining payments at June 30 and December 31 each year through June 30, 2022.
• Lease term: five years (10 semiannual payments).
• No residual value; no purchase option.
• Economic life of equipment: five years.
• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.
• Fair value of the computers at January 1, 2018: $20 million.

-What is the interest revenue that Technoid would report for this lease in its 2018 income statement?
A) $0.
B) $1,673,820.
C) $876,662.
D) None of these answer choices is correct.

Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

•	Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; 
		remaining payments at June 30 and December 31 each year through June 30, 2022. 
	•	Lease term: five years (10 semiannual payments). 
	•	No residual value; no purchase option. 
	•	Economic life of equipment: five years. 
	•	Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. 
	•	Fair value of the computers at January 1, 2018: $20 million.

-What is the interest revenue that Technoid would report for this lease in its 2018 income statement?
A) $0.
B) $1,673,820.
C) $876,662.
D) None of these answer choices is correct.

Quizplus · Accepted Answer

This is $876,662 interest for the first six months: ($20,000,000 ? lease payment of $2,466,754) × 5%, plus $797,158 for the second six months: ($20,000,000 ? lease payment of $2,466,754 ? [$2,466,754 ? 876,662]) × 5%