Roman Company leased equipment from Koenig Company on January 1, 2013, for an ei
ID: 2561168 • Letter: R
Question
Roman Company leased equipment from Koenig Company on January 1, 2013, for an eight-year period. Equal annual payments under the lease are $300,000 and are due on January 1 of each year. The first payment was made on January 1, 2013. The rate of interest contemplated by Roman and Koenig is 8%. The present value of the lease payments is $1,861,875 and the cost of the equipment on Koenig's accounting records was $1,650,000. Assuming that the lease is appropriately recorded as a sales-type for accounting purposes by Koenig, what would Koenig record for this lease arrangement for the year ended December 31, 2013?
a. $0 dealer’s profit and $0 depreciation expense
b. $0 dealer’s profit and $$232,734 depreciation expense
c. $211,875 dealer’s profit and $0 depreciation expense
d. $211,875 dealer’s profit and $$232,734 depreciation expense.
The answer is C. I wonder why depreciation expense is $0?
Can you explain?
Explanation / Answer
Present value of lease payments = $1,861,875
Less: Cost of Equipment = $1,650,000
Dealer's Profit = $211,875
Depreciation under sales-type lease is recorded by lessee and not by lessor so Koenig Company who is lessor will not record depreciation expenses. So Depreciation expenses is 0 for Koenig Company.
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