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Use the Following Information for Questions

question 9

Multiple Choice

Use the following information for questions.
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2011.The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands.The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021.The first of 10 equal annual payments of $621,000 was made on July 1, 2011.Metro had purchased the equipment for $3,900,000 on January 1, 2011, and established a list selling price of $5,400,000 on the equipment.Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.
-Roman Company leased equipment from Koenig Company on July 1, 2011, for an eight-year period expiring June 30, 2019.Equal annual payments under the lease are $300,000 and are due on July 1 of each year.The first payment was made on July 1, 2011.The rate of interest contemplated by Roman and Lennon is 8%.The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Koenig's accounting records was $1,650,000.Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2011?

Definitions:

Operating Cash Flows

Cash generated from the core business operations, excluding financing and investing activities, important for assessing a company's liquidity.

Financial Position

An overview of a company's assets, liabilities, and equity at a specific point in time, presenting a snapshot of its financial health.

Depreciation

Depreciation is the accounting method of allocating the cost of a tangible asset over its useful life.

Net Working Capital

A financial indicator showing the disparity between a company's existing assets and its immediate debts.