2 Free Company leased equipment to the Dolan Company on January 1, 2020, for a t

Question

2 Free Company leased equipment to the Dolan Company on January 1, 2020, for a ten-year period expiring December 31, 2029. Equal annual payments under the lease are $160,000 and are due on January 1 of each year. The first payment was made on January 1, 2020, Free Company based on the lease payment on an implicit rate of return of 9%. The cash selling price of the equipment is $1,120,000 and the cost of the equipment on Free's accounting records was $992,000. Assuming that the lease is appropriately recorded as a sale-type finance lease for accounting purposes by Free, what is the amount of profit on the sale and the interest revenue that Free would record for the year ended December 31, 2020? Question Answer saved Flag question Select one a. $128,000 and $86,400 b. $0 and $0 c. $128,000 and $100,800 d. $128,000 and $43,200

Explanation / Answer

answer d is correct

cash selling price of the equipment = $1,120,000

cost of the equipment on Free's accounting records = $992,000

aount of profit on the sale = 1,120,000- 992,000 = $128,000

implicit rate of interset = 9%

lease amount for 10 years = 160,000 *10 = $1,600,000

revenue = 1,600,000 - 1,120,000 = $480,000

interest revenue = 480,000*9% or (480,000*9)/100 = $43,200

therefore answer d is correct

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