Question

Bryant leased equipment that had a retail cash selling price of $650,000 and a useful life of five years with no residual value. The lessor spent $555,000 to manufacture the equipment and used an implicit rate of 8% when calculating annual lease payments of $150,738 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 $17,500. What is the effect of the lease on the lessor's earnings during the first year (ignore taxes)?
Impact on lessor's pretax earnings
Cost of goods sold
Interest revenue
Sales revenue
Selling expense 738,317
Income effect $738,317

Answer 1

Answer:

$117,441

Explanation:

Impact on lessor's Pretax Earning for First Year

Sales Revenue                 $650,000

Cost of Goods Sold        -$555,000

Selling expense              -$17,500

Interest Revenue              $39,941   ($650,000 - $150,738)*8%

Income Effect                   $117,441

So, the effect of the lease on the lessor's earnings during the first year is $117,441