Question

Bryant leased equipment that had a retail cash selling price of $610,000 and a useful life of four years with no residual value. The lessor paid $535,000 to acquire the equipment and used an implicit rate of 7% when calculating annual lease payments of $168,307 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 $15,500.

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
Income effect	$0

Answer 1

The above transaction is a sales type lease.

Lessor, would debit Lease receivable and credit Sales revenue with the current selling price of $610,000.

Cost of goods sold is debited with $535,000 and the leased asset is credited.

Selling expenses is recognized for the entire $15,500.

Interest Revenue is to be recognized for the first year at 7% on the balance of the lease receivable of $441,693 ($610,000 - $168,307). Interest Revenue is arrived at $30,918.51.

The effect of these transactions on lessor's earnings during the first year are as follows: