Question

16

A Company leased equipment to B Company on July 1, 2022. A Company recorded the lease as a sales-type lease at $730,000, the present value of lease payments discounted at 8%. The lease called for 12 annual lease payments of $90,000 due each July 1. The first payment was received on July 1, 2022. A Company had manufactured the equipment at a cost of $668,000. The total increase in earnings (pretax) on A Company's December 31, 2022, income statement would be: $51,200 $87,600 $113,200 $90,400

Answer 1

Solution:

Option B: 87600

The total earnings consist of two components, the Selling profit and the 6 month interest.

Step 1 : Calculate the interest accrued.

730000 Present Value of Lease Payment Less: First Payment made on 01 July 2022 90000 640000 =640000*8%*6/12 25600 Interest @ 8% for 6 months

Step 2: Selling Profit profit and total earnings:

Sales Revenue Cost of Equipment Selling Profit Add: Interest Earned for 6 months Total Earnings 730000 668000 62000 25600 87600

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