Elba Company leased machinery to Conecuh Company on January 1, 2017, for a ten-year period expiring December 31, 2026. Equal annual payments under the lease are $300,000 and are due on January 1 of each year. The first payment was made on January 1, 2017. The rate of interest used by Elba and Conecuh is 9%. The cash selling price of the machinery is $2,100,000 and the cost of the machinery on Elba's accounting records was $1,860,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Elba, what amount of interest revenue would Elba record for the year ended December 31, 2017? A. $0

B. $162,000

C. $189,000

D. $81,000

Question

Brent

Business

20 December, 00:06

Elba Company leased machinery to Conecuh Company on January 1, 2017, for a ten-year period expiring December 31, 2026. Equal annual payments under the lease are $300,000 and are due on January 1 of each year. The first payment was made on January 1, 2017. The rate of interest used by Elba and Conecuh is 9%. The cash selling price of the machinery is $2,100,000 and the cost of the machinery on Elba's accounting records was $1,860,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Elba, what amount of interest revenue would Elba record for the year ended December 31, 2017? A. $0

B. $162,000

C. $189,000

D. $81,000

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Answers (1)

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Mustache · Answer 1

The interest charged for the year will be the amount that Conecuh has to pay at the start of the year. In this case the amount that Conecuh has to pay at the start of the year (January 1, 2017) is the amount left after his equal annual payment. The price at which Conecuh purchased is $2,100,000 of which $300,000 was paid at the start of the year. So the residue amount is:

Liability = $2,100,000 - $300,000 = $1,800,000

So the interest charge which is 9% is = $1,800,000 * 9% = $162,000

Option B is the correct answer.