Question

Bryant leased equipment that had a retail cash selling price of $710,000 and a useful life of five years with no residual value. The lessor paid $585,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $164,652 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 $20,500.

What is the effect of the lease on the lessor's earnings during the first year (ignore taxes)? (Input decreases to income as negative amounts. Round Interest revenue to the nearest whole dollar.)

Impact on lessor's pretax earnings
Amortization expense
Cost of goods sold
Depreciation expense
Interest expense
Selling expense
Income effect	$0

Answer 1

givn data

selling price = $ 710000

cost of goods sold = $ 585000

implicit rate = 8%

annual lease payment = $ 164652

incremental cost = $ 20500

CALCULATE THE EFFECT OF LEASE ON LESSORS EARNING :

DATE	PARTICULARS	AMOUNT	AMOUNT
31 dec	inerestfor the year (working note)		43628
	sales	710000
	less ; cost of goods sold	(585000)
	PROFIT ON SALE		125000
	LESS : incremental cost		(20500)
	INCREASE IN LESSORS EARNING		148128

WORKING NOTE :

interest = (selling price - annual lease payment ) * interest rate

            = (710000 - 164652) * 8%

             = 43628 (rounded off)

HENCE, THE INCREASE IN LESSORS EARNING IS = $ 148128