Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $26,269 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, the beginning of the lease. The interest rate is 5%. The lessor’s fiscal year is the calendar year. The lessor manufactured this asset at a cost of $125,000. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31(ignore taxes)?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Fistly we have to calculate the selling price of the equipment or present value of lease = 1 installment + Present value of 5 lease payments = 26269 +(26269*((1-(1.05)^-5)/.05)) = 26269 + 26269*4.329477) = $ 140000 First year interest Income = (lease receivable net of 1 installment at the beginning of the lease) *5% 1 = (140000-26269) *5% e = $ 5687 Increase in earnings reported in income statement 5 = sales - cost of goods sold + interest revenue 5 = 140000 - 125000 + 5687 - = $ 20687 Thus the correct answer is increase in earning reported in ncome statement = $ 20687 Thank You