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On January 1, 2018, Savor Corporation leased equipment to Spree Company. The lease term is 9 years. The first payment of $698,000 was made on January 1, 2018. The present value of the lease payments is $4,561,300. The lease is appropriately classified as a sales-type lease.
a. Assuming the interest rate for this lease is 9%, how much interest revenue will Savor record in 2018 on this lease?

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Answer:

$347,697

Explanation:

The interest revenue which shall be recorded by the Savor Corporation for the year ended 2018 in respect of equipment leased to Spree Company shall be calculated using the following mentioned formula:

Interest revenue=(Present value of lease equipment as at January 1, 2018-payment made on January 1, 2018)*interest rate

In the given question:

Present value of lease equipment as at January 1, 2018= $4,561,300

Payment made on January 1, 2018=$698,000

Interest rate=9%

Interest revenue=($4,561,300-$698,000)*9%=$347,697

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