1. MC.20-04 Lease Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July 1, 2016. The lease is appropriately accounted for as a sale by Fox and as a purchase by Tiger. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2026. The first of 10 equal annual payments of $500,000 was made on July 1, 2016. Fox had purchased the equipment for $2,675,000 on January 1, 2016, and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2016, of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000. What is the amount of profit on the sale and the amount of interest income that Fox should record for the year ended December 31, 2016? Oa. so and $159,900 V Ob. $490,000 and $159,900 Oc. $490,000 and $189,900 Od. $700,000 and $189,900 Feedback Check My Work In a sales-type lease, like a direct financing lease, the lessor "sells" the asset and records a receivable. A sales-type lease differs from a direct financing lease in that the fair value of the asset is greater (or less) than its cost or carrying value resulting in manufacturer's profit (loss) [dealer's profit (loss)]. The manufacturer's or dealer's profit or loss is then difference between the following two items: present value of the minimum lease payments computed at the interest rate implicit in the lease (i.e., the sale proceeds) cost or carrying value of the asset plus any initial direct costs minus the present value of the unguaranteed residual value accruing to the benefit of the lessor4. Pr.20-07 Sales-Type Lease with Receipts at End of Year Instructions Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2016. The lease terms, provisions, and related events are as follows: . The lease is noncancelable and has a term of 8 years. . The annual rentals are $32,000, payable at the end of each year. . Tilson agrees to pay all executory costs. . The interest rate implicit in the lease is 14%. . The cost of the equipment to the lessor is $110,000. . The lessor incurs no material initial direct costs. . The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. . The lessor estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is 9 years. Required: 1. Calculate the selling price implied by the lease and prepare a table summarizing the lease receipts and interest revenue earned by the lesson for this sales-type lease. 2. Next Level State why this is a sales-type lease. 3. Prepare journal entries for Lamplighter for the years 2016, 2017, and 2019. 4. Prepare partial balance sheets for Lamplighter for December 31, 2016, and December 31, 2017, showing how the accounts should be disclosed
