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 $189,900Feedback 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 lessor Amount of profit on sale= $490,000 Amount of interest income= $159,900 Explanation: Profit on sale = Selling price of equipment - cost of equipment = $3,165,000 - $2,675,000 = $490,000Sales revenue Formula T =.Sales price (or Average sales price) x-Number of sales=.Sales revenue] *Present value of the lease payments (annual-lease payments), also called-Selling priceT Net sales revenue Formula 1 =.Sales revenue--Sales returns and -allowances --Sales-discounts =.Net-sales revenue f =-$3,165,000--$0.00---$0.00T =-$3,165,0009 Gross Profit Formula T =.Net sales revenue (Present value of the minimum lease payment (annual lease payment)-- Cost- of -Equipment-leased-(or sold)T =-Gross profitsOrT Profit on sale-Formula 1 = Selling price of Equipment - Cost of Equipment =.Profit-on salef =-$3,165,000---$2,675,0009 =-$490,0007 $490,000-is Gross Profit (or-Profit on sale) at the end of December-31, 2016. *I would have to post (record) and report a-gross profit of-$490,000-for year ended-December-31, 2016.T =-$3,165,000--$500,0009 =-$2,665,0009