2). XYZZ Company leased equipment from RRR Company on July 1, year x1, for an eight-year...

2). XYZZ Company leased equipment from RRR Company on July 1, year x1, for an eight-year period expiring June 30, year x9. Equal annual payments under the lease are $200,000 and are due on July 1 of each year. The first payment was made on July 1, x1. The rate of interest contemplated by Trump and Reagan is 8%. The cash selling price of the equipment is $1,241,250 and the cost of the equipment on Reagan's accounting records was $1,100,000. Assuming that the lease is appropriately recorded as “sales-type” by Reagan, what is the amount of gross profit on the sale and the interest income that Reagan would record for the year ended December 31, x1? No tables are needed. Select one: a. $0 and $0. b. $141,250 and $49,650. c. $141,250 and $41,650. d. $0 and $41,650.

Expert Solution

Amortization Shedule of Lease Payment
Year (As adv. Paid)	Annual Lease paid	PVF @ 8%	PV of Lease paid
(a)	(b )	(c)	(d = b x c)
Beg 1 year	2,00,000	1.000	2,00,000
Beg 2 year	2,00,000	0.926	1,85,180
Beg 3 year	2,00,000	0.857	1,71,460
Beg 4 year	2,00,000	0.794	1,58,760
Beg 5 year	2,00,000	0.735	1,47,004
Beg 6 year	2,00,000	0.681	1,36,116
Beg 7 year	2,00,000	0.630	1,26,032
Beg 8 year	2,00,000	0.583	1,16,698
Present Value of MLP (Cash Sale price)	12,41,250


Gross Profit = Present Value of MLP (Cash sale price) - Book value
Gross Profit = $ 12,41,250 - 11,00,000
Gross Profit = $ 1,41,250

Interest Income for the year ended Dec. 31, x1 = (12,41,250 - 2,00,000 x 8 % x 6 /12)
Interest Income for the year ended Dec. 31, x1 = $ 41,650

So the correct option is c. $ 1,41,250 and $ 41,650

ekkarill92 answered 2 years ago

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