Question

Bryant leased equipment that had a retail cash selling price of $690,000 and a useful life of six years with no residual value. The lessor spent $575,000 to manufacture the equipment and used an implicit rate of 8% when calculating annual lease payments of $138,201 beginning January 1, the beginning of the lease. Lease payments will be made January 1 each year of the lease. Incremental costs of consummating the lease transaction incurred by the lessor were $19,500.
Required:
What is the effect of the lease on the lessor's earnings during the first year (ignore taxes)?

Answer 1

Answer:

$139,644

Explanation:

Calculation for the effect of the lease on the lessor's earnings during the first year

Effect on lessor's pretax earnings

Sales revenue 690,000

Less Cost of goods sold(575,000)

Less Selling expense(19,500)

Interest revenue 44,144

Income effect $139,644

Calculation for Interest revenue

Interest revenue=(8%*690,000)-(8%*$138,201)

Interest revenue =55,200-11,056

Interest revenue=44,144

Therefore the effect of the lease on the lessor's earnings during the first year will be $139,644