Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / 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 1, 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?
a. $490,000 and $159,900
b. $490,000 and $189,900
c. $700,000 and $189,900
d. $0 and $159,900
Answer
So, the correct option is A "$490,000 and $159,900".
Explanation
Computation of Amount of Profit on Sale:
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) *12%*6/12
= $159,900
