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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July 1, 2019. The lease is appropriately accounted for as a finance lease. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2029. The first of 10 equal annual payments of $500,000 was made on July 1, 2019. Fox had purchased the equipment for $2,675,000 on January 1, 2019, and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2019, of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000.

Refer to the information for Fox Company above.

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, 2019?

  1. a. $0 and $159,900
  2. b. $490,000 and $159,900
  3. c. $490,000 and $189,900
  4. d. $700,000 and $189,900

To determine

Identify the amount of the profit on the sale and the amount of interest income that Company F should record for the year ended December 31, 2019.

Explanation

Compute the profit on sale of leased asset:

ParticularsAmount ($)
Present value of lease payments over the lease term$3,165,000
Less: Cost of the leased asset($2,675,000)
Profit on sale of asset$490,000

Table (1)

Compute the interest income at the year ended December 31, 2019:

Interestincome=[(Leasereseivable-initialpayment)×12%]×6months12months=[($3

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