Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc.

Question

Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July 1, 2016. The lease is appropriately accounting for as a sale by Fox and as a purchase by Tiger. The lease is for a 10-year period (the useful life of the asset) expiring June 20, 2026. The first of 10 equal annual payments of $500,000 was made on July 1, 2016. Fox has purchased the equipment for $2,675,000 on January 1, 2016, and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2016, of the rent payments over the lease term, discounted at 12% (the appropriate interest rate) was $3,165,000, What is the amount of Profit on the sale and the amount of interest income that Fox should record for the year ended December 31, 2016?

$0 and $159,000

$490,000 and $159,000

$490,0000 and $189,000

$700,000 and $189,000

$0 and $159,000

$490,000 and $159,000

$490,0000 and $189,000

$700,000 and $189,000

Explanation / Answer

The correct option is b. $490,000 and $159,000
Explanation:

Profit on sale = Selling price of equipment - cost of equipment
= $3,165,000 - $2,675,000 = $490,000

Computation of amount of interest income that Fox should record for the year ended December 31, 2016:

Interest income = Net receivable * interest rate * 6/12
= ($3,165,000 - $500,000 paid in July 1, 2016) *12%*6/12
= $159,900

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