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What is the net investment in the lease

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Reference no: EM132955486

Question - An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2019, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000

Residual value - unguaranteed 600,000

Initial direct cost 200,000

Annual rental payable in advance 900,000

Useful life and lease term 8 years

Implicit interest rate 12%

PV of 1 at 12% for 8 periods 0.40

PV of an ordinary annuity of 1 at 12% for 8 periods 4.97

PV of an annuity due of 1 at 12% for 8 periods 5.56

First lease payment January 1, 2019

1. What is the gross investment in the lease?

2. What is the net investment in the lease?

3. What is the total financial revenue?

4. What amount should be recognized as interest income for 2019?

5. What amount of cost of goods sold should be recognized in recording the lease?

Reference no: EM132955486

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