Question

Use the information for IBM from BE21-6. Assume the direct-financing lease was recorded at a present value of \(150,000. Prepare IBM’s December 31, 2017, entry to record interest.

Assume that IBM leased equipment that was carried at a cost of \)150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of \(30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is \)150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM’s January 1, 2017, journal entries at the inception of the lease.

Short answer

Interest Revenue is $9,596

Step-by-step solution

Meaning of Interest revenue

Interest revenue is the income earned by trade from any investments it makes or the debt it holds. Interest revenue can be found by deducting present value with rental payments. The difference amount is multiplied by the implicit interest rate

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
	Interest Receivable	9,596
	Interest Revenue		9,596

Working Notes:-

Calculation of Interest revenue

$$\begin{gathered} \mathrm{Interest}\mathrm{Revenue}=\left(\mathrm{Present}\mathrm{value}-\mathrm{rental}\mathrm{payments}\right)\times \mathrm{interest}\mathrm{rate} \\ =\left(\$150,000-\$30,044\right)\times 8\% \\ =\$119,956\times \frac{8}{100} \\ =\$9.596 \end{gathered}$$