Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight-year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018?1. $565,000 and $166,6002. $565,000 and $198,6003. $0 and $04. $0 and $166,600

Question

Keenan Ho

Business

21 May, 11:20

Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight-year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018?1. $565,000 and $166,6002. $565,000 and $198,6003. $0 and $04. $0 and $166,600

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Cunningham · Answer 1

1. $565,000 and $166,600

Explanation:

In case of recording sale instead of lease the interest should be computed on Cash selling price instead of cost of the equipment.

Interest income = ($4,965,000 - $800,000) * 8%*6/12

= $166,600

As $800,000 is due in July 1

Profit = $4,965,000 - $4,400,000

= $565,000

Therefore, The amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018 is $166,600 and $565,000.