Question

Pop Consulting leased machinery to Red Inc. on July 1, 2018. The lease was recorded as a sales type lease. The present value of the lease payments discounted at 8% was $274,149. Ten annual lease payments of $44,617 are due each July 1 beginning July 1, 2018. Pop had manufactured the equipment at a cost of $156,000. The total increase in earnings (pretax) on Pop's December 31, 2018, income statement would be:_

Answer 1

Answer:

The increase in earnings is $136511.56

Explanation:

Since the lease is a sale type of lease,it means that as soon as the machinery is delivered to the lessee,profit should be recognized on the lease transaction,which is computed below:

Profit on lease=present value of lease payments-costs

                         =$274149-$156000

                          =$118149

However,every six months interest is charged on the lease,which clearly indicates another source of earnings,the interest in the first six months is given below:

Interest=($274149-$44617)*8%

             =$18362.56

Please note that interest is charged after lease payment as lease payment is made in advance not in arrears.

Conclusively, the increase in earnings is $118149+$18362.56

That is $136511.56