Benedict Company leased equipment to Mark Inc. on January 1, 2017. The lease is
ID: 2340564 • Letter: B
Question
Benedict Company leased equipment to Mark Inc. on January 1, 2017. The lease is for an eight-year period, expiring December 31, 2024. The first of eight equal annual payments of $600,000 was made on January 1, 2017. Benedict had purchased the equipment on December 29, 2016, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that at January 1, 2017, the present value of all rental payments over the lease term discounted at a 10% interest rate was $3,520,000.
Required:
What amount of interest income should Benedict record in 2018 (the second year of the lease period) as a result of the lease?
Explanation / Answer
Present Value = $3520000
Equal Annual Payment = $600000
Period = 8 years
Int rate = 10%
First lease payment on January 1, 2017
Year
Installment
Interest
Principle
Balance
0
600000
0
600000
2920000
1 (2017)
600000
292000
308000
2612000
2 (2018)
600000
261200
338800
2350800
Interest Income in 2018 = $261200
Year
Installment
Interest
Principle
Balance
0
600000
0
600000
2920000
1 (2017)
600000
292000
308000
2612000
2 (2018)
600000
261200
338800
2350800
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