[Anonymous]

Howe Co. leased equipment to Kew Corp. on January 2, Year 1, for an eight-year period expiring December 31, Year 8. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, Year 1. The list selling price of the equipment is $3,520,000 and its carrying cost on Howe’s books is $2,800,000. The lease is appropriately accounted for as a sales-type (finance) lease. The present value of the lease payments at an imputed interest rate of 12% (Howe’s incremental borrowing rate) is $3,300,000. What amount of profit on the sale should Howe report for the year ended December 31, Year 1?
a. $500,000 b. $0 c. $90,000 d. $720,000
Explanation
Choice “a” is correct. The excess of the present value of the selling price over its cost is recorded as profit.
Present value of payments $ 3,300,000
Carrying cost (2,800,000)
Profit on sale $ 500,000

My question: Becker’s lecture stated sales (finance) lease should include two profits (Gain on Sale & interest income on the sale). Where is the interest income in this answer?? THANK YOU.

 

 

[Whopper Warrior]

I think it is how the question is worded, stupid I agree. But we recognize a “profit on the sale”, and a “profit on the finance” of the sale. They are two seperate things, ie in a perfect world, Howe company could immediately sell the note recievable for 3.3 million. then we would recognize no intrest income, but we still made a profit on the sale.

you took it a step to far becacuse you looked at ALL income related to the transaction, not the income to the sale.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

I think it is how the question is worded, stupid I agree. But we recognize a “profit on the sale”, and a “profit on the finance” of the sale. They are two seperate things, ie in a perfect world, Howe company could immediately sell the note recievable for 3.3 million. then we would recognize no intrest income, but we still made a profit on the sale.

you took it a step to far becacuse you looked at ALL income related to the transaction, not the income to the sale.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[ColoradoCPA]

Could somebody please show journal entries as of 02/01/1 for this problem? Thank you!!

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[ColoradoCPA]

Could somebody please show journal entries as of 02/01/1 for this problem? Thank you!!

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[Anonymous]

I think you're saying January 2nd, Year 1…so with that in mind, here goes:

DR. Lease receivable 3,300,000

CR. Asset 2,800,000

CR. Gain 500,000

I'm not 100% sure this is correct…someone please correct me if this is wrong 🙂

[Anonymous]

I think you're saying January 2nd, Year 1…so with that in mind, here goes:

DR. Lease receivable 3,300,000

CR. Asset 2,800,000

CR. Gain 500,000

I'm not 100% sure this is correct…someone please correct me if this is wrong 🙂

[Last chance]

Wow what a coincidence!

I'm doing lease right now and came across to this question just now

And i read ur post few min. ago lol

I use wiley book 2013

The questions are so similar but i like this one better.

21. Peg Co. leased equipment from Howe Corp. on July 1, year 1 for an eight-year period expiring June 30, year 9. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, year 1. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, year 1?

Profit on sale Interest revenue a. $720,000 $176,000 b. $720,000 $146,000 c.

$ 45,000 $176,000 d. $ 45,000 $146,000

Answer

21. (b) This is a sales-type lease, so at the inception of the lease, the lessor would recognize sales of $3,520,000 and cost of goods sold of $2,800,000, resulting in a profit on sale of $720,000. In addition, interest revenue is recognized for the period July 1, year 1, to December 31, year 1. The initial net lease payments receivable on 7/1/Y1 is $3,520,000. The first rental payment received on 7/1/Y1 consists entirely of principal, reducing the net receivable to $2,920,000 ($3,520,000 – $600,000). Therefore, year 1 interest revenue for the six months from 7/1/Y1 to 12/31/Y1 is $146,000 ($2,920,000 ×10% ×6/12).

[Last chance]

Wow what a coincidence!

I'm doing lease right now and came across to this question just now

And i read ur post few min. ago lol

I use wiley book 2013

The questions are so similar but i like this one better.

21. Peg Co. leased equipment from Howe Corp. on July 1, year 1 for an eight-year period expiring June 30, year 9. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, year 1. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, year 1?

Profit on sale Interest revenue a. $720,000 $176,000 b. $720,000 $146,000 c.

$ 45,000 $176,000 d. $ 45,000 $146,000

Answer

21. (b) This is a sales-type lease, so at the inception of the lease, the lessor would recognize sales of $3,520,000 and cost of goods sold of $2,800,000, resulting in a profit on sale of $720,000. In addition, interest revenue is recognized for the period July 1, year 1, to December 31, year 1. The initial net lease payments receivable on 7/1/Y1 is $3,520,000. The first rental payment received on 7/1/Y1 consists entirely of principal, reducing the net receivable to $2,920,000 ($3,520,000 – $600,000). Therefore, year 1 interest revenue for the six months from 7/1/Y1 to 12/31/Y1 is $146,000 ($2,920,000 ×10% ×6/12).

[Last chance]

Nve next question #22 is exactly same as yours lol

[Last chance]

Nve next question #22 is exactly same as yours lol

[ColoradoCPA]

CPA4birthdaypresent, Thank you for the answer!!!! I think we need to take in consideration COGS. This is the sales type lease.

December4th, I am trying to figure out the difference between m/c 22 and m/c 21. I want to understand the journal entries. They do appear different. It is hard for me to understand without JE.

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[ColoradoCPA]

CPA4birthdaypresent, Thank you for the answer!!!! I think we need to take in consideration COGS. This is the sales type lease.

December4th, I am trying to figure out the difference between m/c 22 and m/c 21. I want to understand the journal entries. They do appear different. It is hard for me to understand without JE.

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[ColoradoCPA]

These are my JE, but I do not know if they are correct:

m/c 22

Dr Lease Recievable 3,520,000

Dr COGS 2,800,000

Cr Sales 3,300,000

Cr Inventory 2,800,000

Cr Unearned Interest 220000

m/c 21

Dr Lease Receivable 3,520,000

Dr COGS 2,800,000

Cr Sales 3,520,000

Cr Inventory 2,800,000

I do not understand why the sales amounts are different m/c 22 vs m/c 21 ((( Could somebody help with these two problems?

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[ColoradoCPA]

These are my JE, but I do not know if they are correct:

m/c 22

Dr Lease Recievable 3,520,000

Dr COGS 2,800,000

Cr Sales 3,300,000

Cr Inventory 2,800,000

Cr Unearned Interest 220000

m/c 21

Dr Lease Receivable 3,520,000

Dr COGS 2,800,000

Cr Sales 3,520,000

Cr Inventory 2,800,000

I do not understand why the sales amounts are different m/c 22 vs m/c 21 ((( Could somebody help with these two problems?

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[Last chance]

#21 #22 are different because in #21 they didnt provide you the present value of payment so you use the selling price to compute.

#22 give you the pv of payments. Therefore u use that. Sp is not always the best one to use because they list price and u can buy it for less price.

But i'm confused on wording.. They say pv of payments is the representative of its FV… which makes sense.. But.. When u do bonds problems, pv is not fv. They are different 🙁

[Author]

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