Asked by Joselyne Saldaña Gonzalez on Apr 29, 2024
Verified
Refer to Exhibit 21-4.What is the amount of interest revenue that General should recognize on the lease for the year ended December 31, 2010? (Round the answer to the nearest dollar.
A) $21, 869
B) $22, 550
C) $25, 954
D) $26, 635
Direct Financing Lease
A type of lease where the lessor records receivables equal to the net investment in the lease and recognizes income from interest over the lease term.
Interest Revenue
Income earned from lending money or depositing funds in interest-bearing accounts.
Present Value Factors
Numerical factors used to calculate the present value of a future amount by considering the time value of money and interest rates.
- Evaluate the current monetary value of lease payments to classify the lease and decide on the appropriate accounting treatment.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
B
Explanation :
The first step is to calculate the present value of the minimum lease payments:
PV = $60,000 x 3.6048 (from the present value table) = $216,288
Next, we need to calculate the present value of the residual value:
PV of Residual Value = $10,000 x 0.5674 (from the present value table) = $5,674
Total present value = $221,962
Since General desires a 12% rate of return, the interest revenue can be calculated as follows:
Interest Revenue = Total Present Value x Rate of Return
= $221,962 x 12%
= $26,635.44
Thus, the answer is B) $22,550.
PV = $60,000 x 3.6048 (from the present value table) = $216,288
Next, we need to calculate the present value of the residual value:
PV of Residual Value = $10,000 x 0.5674 (from the present value table) = $5,674
Total present value = $221,962
Since General desires a 12% rate of return, the interest revenue can be calculated as follows:
Interest Revenue = Total Present Value x Rate of Return
= $221,962 x 12%
= $26,635.44
Thus, the answer is B) $22,550.
Learning Objectives
- Evaluate the current monetary value of lease payments to classify the lease and decide on the appropriate accounting treatment.