Avionics Inc. ,a dealer in machinery and equipment,leased equipment to Benchmark Products on July 1,2014.The lease is appropriately accounted for as a sale by Avionics and as a purchase by Benchmark.The lease is for a ten-year period (the useful life of the asset)expiring June 30,2021.The first of ten equal annual payments of $250,000 was made on July 1,2014.Avionics had purchased the equipment for $1,337,500 on January 1,2014,and established a list selling price of $1,687,500 on the equipment.Assume that the present value at July 1,2014,of the rent payments over the lease term discounted at 12 percent (the appropriate interest rate)was $1,582,500.What is the amount of profit on the sale and the amount of interest income that Avionics should record for the year ended December 31,2014?

Question

Quizplus · Accepted Answer

To calculate profit on the sale, we need to find the difference between the selling price and cost of the equipment:
Profit on sale = Selling price - Cost of equipment 
Profit on sale = $1,687,500 - $1,337,500
Profit on sale = $350,000

To calculate interest income, we need to find the difference between the cash received in the first year and the interest revenue:
Interest income = Cash received - Interest revenue 
Interest revenue can be calculated using the present value of the rent payments:
Interest revenue = Present value x Interest rate 
Interest revenue = $1,582,500 x 12% 
Interest revenue = $189,900

Cash received in the first year is $250,000, so:
Interest income = $250,000 - $189,900 
Interest income = $60,100

Therefore, the amount of profit on the sale is $350,000 and the amount of interest income is $60,100. Option B is correct.