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On january 1, 2020 Novek Inc. leases equipment to Born Inc. The equipment has a selling...

On january 1, 2020 Novek Inc. leases equipment to Born Inc. The equipment has a selling price of $100,000 a carrying value of $80,000, an economic life of 4 years and a lease term of 3 years. Novek expects to earn a return of 10% on the selling price of the equipment. There is a purchase option at the end of the lease of 10,000 that is likely to be exercised by Born. The annual lease payment is $33,809.39 with the first payment due immediately on january 1, 2020

What is the gross profit (if any) that Novek records on January 1, 2020?

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Answer #1
Calculation of Gross Profit On Lease on 1st January 2020
Gross Profit = PV of Future Cash Flows Less Carrying Value of Lease Asset
PV of Cash Flows
Year Lease Payments Disc Rate @ 10% PV
1 $33,809 1 $33,809
2 $33,809 0.909090909 $30,736
3 $33,809 0.826446281 $27,942
3 $10,000 0.751314801 $7,513
$1,00,000
Gross Profit = 100000 - 80000
= $20,000
Gross Profit that Novek will record on 1st January 2020 is $20,000.
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