Question

Ajax Company manufactures equipment that they sell or lease. On January 1, 2019, Ajax leased equipment to Comet Company for a five-year period after which ownership of the leased asset will be transferred to Comet. The lease calls for equal annual payments of $50,000. The first payment is due on January 1, 2019. Thereafter, the payments are due on December 31st of each year with the second payment due on December 31, 2019. The equipment cost Ajax $176,000 to produce. The implicit interest rate for the lease is 5½ percent. For the year ended December 31, 2019, what amount of total income (the sum of gross profit on the sale and interest income) related to this lease transaction should Ajax report?

Question 2 options:

	$49,258
	$9,639
	$58,897
	$61,647

Answer 1

In the case of manufacturer lessor, the profit is recognized upfront by comparing the normal cash price and the manufacturer’s cost of production. Here the cash price of the asset is the sum of all present value of all the lease rentals

Note: Year 0 signifies oa

Total PV of rentals = 225,257.51

Cost to Produce = 176,000.00

Gain = 225257.51-176000 = 49257.51 = 49258 (R/off)

So correct answer is option A $49258.