Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2018.
Question:
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a finance lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of 828,000 was made on July 1, 2018. Metro had purchased the equipment for 5,250,000 on January 1, 2018, and established a list selling price of 7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was 6,000,000. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2018?
a. 300,000 and 206,880
b. 300,000 and 240,000
c. 3,600,000 and 206,880
d. 3,600,000 and 160,000