CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Oglebay Co. manufactures equipment that is either sold or leased. They leased equipment to Lakeview Inc. on 12/31/2015 for a five-year period ending on 12/31/2020, at which time ownership rights will be transferred to Lakeview. Annual lease payments of $22,000 (which include $2,000 in executory costs) are due on 12/31 beginning in 2015, there are no material uncertainties with regard to the lease, and collectability is reasonably assured. Oglebay's implicit rate of interest used to compute the payments was 10%. If the sales price of the equipment is $77,000 and the cost is $60,000, how much income should Oglebay realize from the lease arrangement for the year ending on 12/31/2015?

A. $0
B. $17,000
C. $19,000
Correct Answer: B

The conditions of this lease arrangement classify it as a sales-type lease for the lessor, Oglebay Co. Since the question asks for the income for 2015, only the gross profit of $17,000 ($77,000 - $60,000) is recognized. Interest income will be recognized in 2016 and beyond.

User Contributed Comments 5

User Comment
mtcfa If it states that the firstlease payment is due on 12/31/2015, why is no interest income included for 2015?
lawrence that's lease payment in advance: unearned revenue. not your income for 2015.
2014 As per text book,

In a sales type lease profit is recognised in the begining of lease term
Shaan23 MTCFA. Its a little tricky but in year one you're entire Lease payment goes to reducing your Liability payments and nothing goes to interest cause it begins at time 0.

In the second year your lease payment has an interest component and a reduction in liability component.
farhan92 further to shaan23's comment -check out the example 10 of the text book (pg 264)
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