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What is the gross investment in the lease

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Reference no: EM132544574

Question - An entity is in the business of leasing new sophisticated equipment under a direct financing lease. The lessor expects a 12% return on net investment. At the end of the lease term, the equipment will revert to the lessor. At the beginning of current year, an equipment is leased to a lessee with the following information:

Cost of equipment to the lessor 5,000,000

Residual value - unguaranteed 600,000

Annual rental payable in advance at the beginning of each year 900,000

Initial direct cost incurred by the lessor 250,000

Useful life and lease term 8years

Implicit interest rate 12%

Required -

Q1. What is the gross investment in the lease?

Q2. What is the net investment in the lease?

Q3. What is the total unearned interest income?

Q4. What amount of interest income should be recognized for the current year?

Reference no: EM132544574

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