Question: Peg Co. leased equipment from Howe Corp. on July 1, 2011 for an eight-year period expiring June 30, 2019. Equal payments under the lease are

Peg Co. leased equipment from Howe Corp. on July 1, 2011 for an eight-year period expiring June 30, 2019. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2011.

The rate of interest contemplated by Peg and Howe is 10%.

The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is

$2,800,000. The lease is appropriately recorded as a salestype lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, 2011?

Profit on sale Interest revenue

a. $720,000 $176,000

b. $720,000 $146,000

c. $ 45,000 $176,000

d. $ 45,000 $146,000

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