LeaseCo Industries leased equipment to UserCorp. on July 1, 2018. LeaseCo record

Question

LeaseCo Industries leased equipment to UserCorp. on July 1, 2018. LeaseCo recorded the lease as a sales-type lease at $900,000, the present value of lease payments discounted at 10%. The lease called for ten annual lease payments of $150,000 due each July 1. The first payment was received on July 1, 2018. LeaseCo had manufactured the equipment at a cost of $780,000. What is the total increase in earnings (pretax) on LeaseCo’s December 31, 2018, income statement?

A) $154,000

B) $167,000

C) $157,500

D) $195,000

Explanation / Answer

Solution: $157,500

Working:

Interest income = 10% * (900,000 -150,000) *6/12 = $37500

Dealer's profit = $900,000 - $780,000 = $120,000

Total increase in earnings (pretax) = $37500 + $120,000 = $157,500

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