JM Company leased equipment from KP Company on July 1, 2004, for an eight-year p

Question

JM Company leased equipment from KP Company on July 1, 2004, for an eight-year period expiring June 30, 2012. Equal annual payments under the lease are $200,000 and are due on July 1 of each year. The first payment was made on July 1, 2004. the rate of interest contemplated by JM and KP is 8%. The cash selling price of the equipment is $1,241,250 and the cost of the equipment on KP's accounting records was $1,100,000. Assuming that the lease is appropriately recorded as a capital lease by KP, what is the amount of profit on the sale and the interest income that KP would record for the year ended December 31, 2004?Question 1 options:
a. $0 and $0 b.$0 and $41,650 c. $141,250 and $41,650 d.$141,250 and $49,650

Explanation / Answer

option "c" is the correct answer.. when it is capital lease under sellinf option its selling price                                  = 1241250 less: cost                                           = 1100000 profit                                                = $141250 interest       =[1241250-200000]*8%=$8330 for 6 monts = 99300*6/12 = $41650 interest       =[1241250-200000]*8%=$8330 for 6 monts = 99300*6/12 = $41650

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