On January 1, 2013, Calloway Company leased a machine to Zone Corporation. The lease qualifies as...

Question:

On January 1, 2013, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $290,000 for the machine and is leasing it to Zone for $40,000 per year, an amount that will return 10% to Calloway. The present value of the minimum lease payments is $290,000. The lease payments are due each January 1, beginning in 2013. What is the appropriate interest entry on December 31, 2013?

a) Interest recievable 29,000

Interest revenue 29,000

b) Interest recievable 25,000

Interest revenue 25,000

c) Cash 29,000

Interest revenue 29,000

d) Cash 25,000

Interest recievable 25,000

Lease

Lease is a long term liability on the perspective of the lessee. It is a contract entered by two persons where one provides a leased asset and the other one pays for it.

Answer and Explanation:

B.

Account Title Debit Credit
Interest receivable 25,000
Interest Revenue 25,000

(290,000 - 40,000) * 10% = 25,000


Learn more about this topic:

Loading...
Accounting for Long-Term Liabilities

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 6
4.5K

Related to this Question

Explore our homework questions and answers library