Reference no: EM132544574
Question - An entity is in the business of leasing new sophisticated equipment under a direct financing lease. The lessor expects a 12% return on net investment. At the end of the lease term, the equipment will revert to the lessor. At the beginning of current year, an equipment is leased to a lessee with the following information:
Cost of equipment to the lessor 5,000,000
Residual value - unguaranteed 600,000
Annual rental payable in advance at the beginning of each year 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8years
Implicit interest rate 12%
Required -
Q1. What is the gross investment in the lease?
Q2. What is the net investment in the lease?
Q3. What is the total unearned interest income?
Q4. What amount of interest income should be recognized for the current year?