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Amazon leased equipment from United Machines on July 1, 2020, in a finance lease. The present value of the lease payments discounted at 10% was $82,000. Ten annual lease payments of $12,000 are due each year beginning July 1, 2020. United Machines had constructed the equipment recently for $66,000. How much related interest revenue will United Machines record for the year ending December 31, 2020

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Answer: $3,500

Explanation:

A payment of $12,000 had been made on the 1st of July already so the lease value would have reduced to;

= 82,000 - 12,000

= $70,000

Interest on this is;

= 10% * 70,000

= $7,000

However, only half a year have passed yet the $7,000 is for a year so by the accrual principle only the insurance for half a year should be recognized;

= 70,000 * 6/12 months

= $3,500

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