**Case Study: Lease Accounting for Wiggy, Inc. - Educational Resource** **Scenario:** Wiggy, Inc. leased equipment to Smith Co. on January 1, 2021, under a finance/sales-type lease. The lease terms required five annual payments of $10,000, starting January 1, 2021. The present value (PV) of these lease payments, discounted at an 8% interest rate, is $43,121. The equipment's retail fair value is noted to be $43,121. Additionally, Wiggy constructed this equipment recently at a total cost of $35,500. **Question:** Ignoring taxes, what amount of income should Wiggy record in its income statement for 2021 in connection with the lease? **Options:** - $10,271 - $43,121 - $7,621 - $18,914 **Discussion:** This scenario provides learners with a practical example of how finance leases impact financial statements. The options presented require the application of financial accounting principles to select the correct income to be recorded for the year 2021. **Note:** The educational material explains lease accounting principles, such as the recognition of sales-type lease income, the treatment of cost and revenue, and the calculation of interest income using present value techniques. Understanding such lease agreements helps in comprehending their effects on both the income statement and the balance sheet, showcasing real-world applications of theoretical accounting principles.
**Case Study: Lease Accounting for Wiggy, Inc. - Educational Resource** **Scenario:** Wiggy, Inc. leased equipment to Smith Co. on January 1, 2021, under a finance/sales-type lease. The lease terms required five annual payments of $10,000, starting January 1, 2021. The present value (PV) of these lease payments, discounted at an 8% interest rate, is $43,121. The equipment's retail fair value is noted to be $43,121. Additionally, Wiggy constructed this equipment recently at a total cost of $35,500. **Question:** Ignoring taxes, what amount of income should Wiggy record in its income statement for 2021 in connection with the lease? **Options:** - $10,271 - $43,121 - $7,621 - $18,914 **Discussion:** This scenario provides learners with a practical example of how finance leases impact financial statements. The options presented require the application of financial accounting principles to select the correct income to be recorded for the year 2021. **Note:** The educational material explains lease accounting principles, such as the recognition of sales-type lease income, the treatment of cost and revenue, and the calculation of interest income using present value techniques. Understanding such lease agreements helps in comprehending their effects on both the income statement and the balance sheet, showcasing real-world applications of theoretical accounting principles.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:**Case Study: Lease Accounting for Wiggy, Inc. - Educational Resource**
**Scenario:**
Wiggy, Inc. leased equipment to Smith Co. on January 1, 2021, under a finance/sales-type lease. The lease terms required five annual payments of $10,000, starting January 1, 2021. The present value (PV) of these lease payments, discounted at an 8% interest rate, is $43,121. The equipment's retail fair value is noted to be $43,121. Additionally, Wiggy constructed this equipment recently at a total cost of $35,500.
**Question:**
Ignoring taxes, what amount of income should Wiggy record in its income statement for 2021 in connection with the lease?
**Options:**
- $10,271
- $43,121
- $7,621
- $18,914
**Discussion:**
This scenario provides learners with a practical example of how finance leases impact financial statements. The options presented require the application of financial accounting principles to select the correct income to be recorded for the year 2021.
**Note:**
The educational material explains lease accounting principles, such as the recognition of sales-type lease income, the treatment of cost and revenue, and the calculation of interest income using present value techniques.
Understanding such lease agreements helps in comprehending their effects on both the income statement and the balance sheet, showcasing real-world applications of theoretical accounting principles.
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