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# Calloway Company: Compute Interest on a financing lease

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3. (1) On January 1, 2009, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid \$240,000 for the machine and is leasing it to Zone for \$34,000 per year, an amount that will return 10% to Calloway. The present value of the minimum lease payments is \$240,000. The lease payments are due each January 1. What is the appropriate interest entry on December 31, 2009?

A. Cash 24,000
Interest revenue 24,000

B. Cash 20,600
Interest receivable 20,600

C. Interest receivable 20,600
Interest revenue 20,600

D. Interest receivable 24,000
Interes revenue 24,000

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#### Solution Summary

Attached is the answer

\$2.19

## Compute avoidable interest

1. Brett Hull Company is constructing a building. Construction began on February 1 and was completed
on December 31. Expenditures were \$1,500,000 on March 1, \$1,200,000 on June 1, and \$3,000,000
on December 31 Brett Hull Company borrowed \$1,000,000 on March 1 on a 5-year, 12% note to help
finance construction of the building. In addition, the company had outstanding all year a 13%, 5-year,
\$2,000,000 note payable and a 15%, 4-year, \$3,500,000 note payable.
Compute avoidable interest for Brett Hull Company.

2. Callaway Golf Co. leases telecommunication equipment. Assume the following data for equipment
leased from Photon Company. The lease term is 5 years and requires equal rental payments of \$30,000
at the beginning of each year. The equipment has a fair value at the inception of the lease of \$138,000, an
estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third
parties. Photon set the annual rental to earn a rate of return of 10%, and this fact is known to Callaway.
The lease does not transfer title or contain a bargain purchase option. How should Callaway classify this
lease?

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