Question

Pop Consulting leased machinery to Red Inc. on July 1, 2018. The lease was recorded as a sales type lease. The present value of the lease payments discounted at 8% was $452,712. Ten annual lease payments of $118,385 are due each July 1 beginning July 1, 2018. Pop had manufactured the equipment at a cost of $350,000. The total increase in earnings (pretax) on Pop's December 31, 2018, income statement would be:_________

Answer 1

The total increase in earnings (pretax) on Pop's December 31, 2018, income statement would be $269,875.50

Step-by-step explanation:

The computation of the total increase in earning is shown below:

= Sales type lease - the cost of equipment + interest on revenue

where,

Interest on revenue = Sales type lease - annual lease payment × rate of interest × (number of months ÷ total number of months in a year)

= $452,712 - $118,385 × (6 months ÷ 12 months)

= $167,163.50

The 6 months is calculated from July 1,2018 to December 31,2018

And, the other items values remain the same

Now put these values to the above formula

So, the value would equal to

= $452,712 - $350,000 + $167,163.50

= $269,875.50