Problem
On January 1, Year 1, Company A leased a machine to Company B under a direct-financing lease. The lease was for a 6-year period that approximated the useful life of the machine. The machine has no residual value at the end of the lease, and its fair value at the inception of the lease was $62,000. Company A expects to earn a 5% return on the lease of the machine (the rate implicit in the lease). The six annual equal lease payments are payable at the end of each year, starting December 31, Year 1. Information on present value factors is as follows:
Present value of $1 at 5% for 6 periods 0.7462
Present value of an ordinary annuity of $1 at 5% for 6 periods 5.0757
Use the information above to calculate each of the items below. Enter the appropriate amounts in the shaded cells below. Enter all amounts as positive values. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).
1. Manufacturer's or dealer's profit recognized from the lease
2. The annual lease payment made by Company B at the end of each year
3. The amount of gross investment in the lease recognized at the inception of the lease
4. Total amount of interest revenue that Company A will earn over the lease period
5. The amount of net investment in the lease recognized at the inception of the lease
6. The amount of interest revenue on the lease recognized by Company A in Year 1
7. The amount of net investment in the lease that should be reported in Company A's December 31, Year 1, financial statements.