- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 9. Accounting and Reporting by the Lessor

###
**CFA Practice Question**

Beresford Company leased equipment from Fisher Company on July 1, 2015, for an eight-year period expiring June 30, 2023. Equal annual payments under the lease are $100,000 and are due on July 1 of each year. The first payment was made on July 1, 2015. The rate of interest established by Beresford and Fisher is 8%. The cash-selling price of the equipment is $620,625 and the cost of the equipment on Fisher's accounting records was $550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Fisher, what is the amount of profit on the sale and the interest income that Fisher would record for the year ending December 31, 2015?

A. $0 and $20,825

B. $70,625 and $20,825

C. $70,625 and $24,825

**Explanation:**The profit is the selling price less the cost: $620,625 - $550,000 = $70,625

The interest income is the sales price less the payment received times the interest rate. 4% is used since it is half a year. ($620,625 - $100,000) x .04 = $20,825

###
**User Contributed Comments**
5

User |
Comment |
---|---|

shasha |
just before the 1st lease payment, Fisher should record a net investment receivable of $620,625. Upon 1st payment of $100,000, Fisher should amortize $50,350 to reduce investment receivable to $570,275. 50,350 = 100,000 - 620,625*.08 (cash-in as interest revenue) so interest revenue for half year should be (620,625*.08)/2 = 24,825. C is the correct answer. not all of the $100,000 is taken as inteset revenue, anybody agree? |

shasha |
oops, it's "annuity due" again! i was wrong. 1st payment of $100,000 should be taken away from the pv to get the beginning lease receivable. 2nd payment of $100,00 is actually taken as the FIRST interest revenue. |

CoffeeGirl |
Profit = sales - COGS interest expenses = net investment in lease x 8% net investment in lease = 620625 interest income = (620625 - 100000 )x 4%. |

student111 |
why interest is used 4% i didnt get it |

czar |
it is half of 8% since it is for 6 months |