Question

Beta Company leased equipment from Summer Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $50,000 over an eight-year lease term (also the asset’s useful life), with the first payment at January 1, 2019, the beginning of the lease. The interest rate is 6%. The asset being leased cost Summer $300,000 to produce. Costs of $5,866 for legal fees for the lease execution were the responsibility of the lessor. The total increase (decrease) in earnings (pretax) on Summer’s December 31, 2019, income statement would be

Answer 1

Answer:

Total increase in pretax earnings on Summer’s December 31, 2019, income statement is $20,253

Explanation:

Fair value of asset sold on lease = Present value of lease payments = $50,000 * Cumulative PV factor at 6% for 8 periods of annuity due

= $50,000 * 6.20979

= $310,490

Interest income for 2019 = ($310490 - $50,000) * 6% = $15,629

Total increase in pretax earnings on Summer’s December 31, 2019, income statement = $310490 - $300,000 + $15,629 - 5866 = $20,253