Beta Company leased equipment from Summer Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $50,000 over an eight-year lease term (also the asset's useful life), with the first payment at January 1, 2019, the beginning of the lease. The interest rate is 6%. The asset being leased cost Summer $300,000 to produce. Costs of $5,866 for legal fees for the lease execution were the responsibility of the lessor. The total increase (decrease) in earnings (pretax) on Summer's December 31, 2019, income statement would be

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Business

Armani Waller

13 November, 03:26

Beta Company leased equipment from Summer Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $50,000 over an eight-year lease term (also the asset's useful life), with the first payment at January 1, 2019, the beginning of the lease. The interest rate is 6%. The asset being leased cost Summer $300,000 to produce. Costs of $5,866 for legal fees for the lease execution were the responsibility of the lessor. The total increase (decrease) in earnings (pretax) on Summer's December 31, 2019, income statement would be

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Jamya Chung · Answer 1

Total increase in pretax earnings on Summer's December 31, 2019, income statement is $20,253

Explanation:

Fair value of asset sold on lease = Present value of lease payments = $50,000 * Cumulative PV factor at 6% for 8 periods of annuity due

= $50,000 * 6.20979

= $310,490

Interest income for 2019 = ($310490 - $50,000) * 6% = $15,629

Total increase in pretax earnings on Summer's December 31, 2019, income statement = $310490 - $300,000 + $15,629 - 5866 = $20,253