Question

On December 31, 2018, Perry Corporation leased equipment to Admiral Company for a five-year period.

The annual lease payment, excluding nonlease components, is $42,000.

The interest rate for this lease is 11%.

The payments are due on December 31 of each year.

The first payment was made on December 31, 2018.

The normal cash price for this type of equipment is $155,000 while the cost to Perry was $134,000.

For the year ended December 31, 2018, by what amount will Perry's earnings increased due to this lease (ignore taxes)?

Answer 1

Perry's earnings will be increased by $21,000 due to this lease.

Step-by-step explanation:

Increase in earning is the difference of price of the lease and the cost incurred for the lease of asset.

Fair value$155,000

Cost = $134,000

Profit on sale = $155,000 - $134,000

Profit on sale = $21,000

As equipment was leased on December 31 So, no interest is earned in year 2018. $21,000 will be added to the earnings of Perry in 2018 due to this lease.