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Lease - depreciation, interest and profit

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Use the following information for questions I and II below.

Risen Company, a dealer in machinery and equipment, leased equipment to Foran, Inc., on July 1, 2008. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2018. The first of 10 equal annual payments of $621,000 was made on July 1, 2008. Risen had purchased the equipment for $3,900,000 on January 1, 2008, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2008, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.

I. Assuming that Foran, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that Foran should record for the year ended December 31, 2008?

a. $225,000 and $155,160
b. $225,000 and $180,000
c. $270,000 and $155,160
d. $270,000 and $180,000

II. What is the amount of profit on the sale and the amount of interest income that Risen should record for the year ended December 31, 2008?

a. $0 and $155,160
b. $600,000 and $155,160
c. $600,000 and $180,000
d. $900,000 and $360,000

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Solution Summary

The solution explains how to calculate depreciation, interest and profit in relation to a lease transaction

Solution Preview

1. The depreciation per year is 4,500,000/10 = 450,000. Since the lease started on July 1, depreciation will be for half year and would be 450,000/2=$225,000
The interest amount would ...

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