Question

Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances:

Leased equipment $400,000
Less accumulated depreciation--capital lease 384,000
$ 16,000
Interest payable $ 1,520
Lease liability 14,480
$16,000
If, at the end of the lease, the fair value of the residual value is $9,800, what gain or loss should Geary record?
a. $4,680 gain
b. $8,280 loss
c. $6,200 loss
d. $9,800 gain

Answer 1

c. $6,200 loss

Step-by-step explanation:

Calculating the gain or loss Geary should record:

Gain or loss = Fair value of residual value - Value of leased equipment

Gain or loss = $9,800 - $16,000

Loss = $6,200

So, the loss that Geary should record is $6,200.