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What is the amount of profit on the sale

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Question - Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July 1, 2016. The lease is appropriately accounted for as a sale by Fox and as a purchase by Tiger. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2026. The first of 10 equal annual payments of $500,000 was made on July 1, 2016. Fox had purchased the equipment for $2,675,000 on January 1, 2016, and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2016, of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000.

What is the amount of profit on the sale and the amount of interest income that Fox should record for the year ended December 31, 2016?

a. $490,000 and $159,900

b. $490,000 and $189,900

c. $700,000 and $189,900

d. $0 and $159,900

Reference no: EM132923105

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