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Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc
Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July I, 2016. The lease is appropriately accounted 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 30, 2026. The first of 10 equal annual payments of 500,000 was made on July 1, 2016. Fox had 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?
Expert Solution
Profit on sale = Selling price of equipment - cost of equipment
= $3,165,000 - $2,675,000
= $490,000
Interest income = Net receivable * interest rate * 6/12
= ($3,165,000 - $500,000)* 12%* 6/12
= $159,900
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