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Basic Question 3 of 15
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?
B. $17,000
C. $19,000
A. $0
B. $17,000
C. $19,000
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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Colin Sampaleanu
Learning Outcome Statements
explain the financial reporting of leases from the perspectives of lessors and lessees
CFA® 2025 Level I Curriculum, Volume 2, Module 8.