Question

A lease agreement that qualifies as a finance lease calls for annual lease payments of $50,000 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 $235,000. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: a. Determine the price at which the lessor is "selling” the asset (present value of the lease payments). b. Create a partial amortization through the first payment on January 1, 2017. c. What would be the increase in earnings that the lessor would report in its income statement for the first year ended December 31 (ignore taxes)? Complete this question by entering your answers in the tabs below. Required A Required B Required C What would be the increase in earnings that the lessor would report in its income statement for the first year ended December 31 (ignore taxes)? (Input decreases to income as negative amounts. Round your answers to nearest whole number.) Pretax impact on income related to the lease: Sales revenue Interest revenue 10,824 Total pretax impact on income $ 10,824

Answer 1

Manufacturing companies may set up a leasing company to provide sales finance
support. Manufacturers will produce goods and have a manufacturing cost of sales.
When leasing, they will not use this cost of sales as the basis for calculating the terms of
a lease. Instead, they will calculate the lease terms on the basis of the normal cash price
of the asset (i.e. the asset’s fair value). The difference between the normal cash price
and the manufacturer’s cost of sales is a sales profit for the manufacturer.