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 table through the second payment on January 1, 2017. c. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31, 2016 (ignore taxes)?

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 table through the second payment on January 1, 2017. c. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31, 2016 (ignore taxes)?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

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 table through the second payment on January 1, 2017.
c. What would be the increase in earnings that the lessor would report in its income statement for the year ended December 31, 2016
(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 year ended December 31,
2016 (ignore taxes)? (Input decreases to income as negative amounts. Round your answers to nearest whole number.)
Answer is complete but not entirely correct.
Pretax impact on income related to the lease:
Sales revenue
✓ $ 266,474
Cost of goods sold
Interest revenue
Total pretax impact on income
✓
$
235,000 X
10,824
512,298

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