peg.co leased equipment frpm Howe corp. on July1,2009 for an eight year period expiring june 30,2017.equal payments under the lease are $600,000 and are due on July 1 of each year.The first payment was made on july 1,2009. The rate of interest contemplated by Peg and Howe is 10%.The cash selling price og equipment is $3,520,000 and cost of equipment on Howe's accounting records is 2,800,000.The lease is appropriately recorded as a sales-type lease.what amount of profit on the sale and interest revenue that Howe should record for the year ended December 31,2009?

Answer :

Pft on sale720,000 = Selling price 3,520,000 - Cost 2,800,000

Int Revenue = 146,000

Outstanding Lease R.ble = 2,920,000

3520,000(Mim.Lease Pmt) - 600,000 initial pmt = 2,920,000

2,920,000 x 10% = 292,000 x 6/12 =146,000

My confusion is J E :

Dr. Lease Rble 4,800,000(600,000 *8yrs)

Cr. Sales         & nbsp;      3,520,000

Cr.unearned Interest ..1280,000

Is lease Receivable for 4,800,000 and Unearned Interedt for 1,280,000..I have a feeling thats wrong..Plz help...

You forgot to Credit the Equipment at its cost: 2,800,000

Debit: Gross Lease Receivable 4,800,000

Credit: Equipment 2,800,000

Credit: Sales 720,000

Credit: Unearned Interest Revenue 1,280,000

In this question, they asked for Interest Revenue just for 12/31/2009.  For 6 months only, therefore, 146,000 is correct. The JE is for entire 8 years.