Bryant leased equipment that had a retail cash selling price of $710,000 and a u

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

Explanation / Answer

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 :

WORKING NOTE :

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

            = (710000 - 164652) * 8%

             = 43628 (rounded off)

HENCE, THE INCREASE IN LESSORS EARNING IS = $ 148128

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

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