Question

Cormorant Corp. manufactured equipment at a cost of $600,000 and leased it to Boreal Corp. on January 1, year 9 for an eight-year period expiring December 31, year 16. Eight years is considered a major part of the asset’s economic life. Equal payments under the lease are $60,000 and are due on January 1 and July 1 of each year. The first payment was made on January 1, year 9. The list selling price of the equipment is $750,000 and the implicit rate used by Cormorant is 8%. What amount of selling profit or loss should Cormorant report for the year ended December 31, year 9?

Answer 1

$127,104 profit

Step-by-step explanation:

Given the following :

Cost of manufacture = $600,000

Periodic payment made semianually = $60,000

Implicit interest rate (i) = 8% ; hence semiannual interest rate = 8% / 2 = 0.04

Number of lease years = 8 years ; period = (2 × 8) = 16 periods

Semiannual payment * (present value of annuity due factor)

Using the present value of annuity due factor table, PVAD(4%, 16) = 12.1184

Hence,

$60,000 × 12.1184 = 727, 104

Profit or loss made:

$727,104 - Cost of manufacture

$727,104 - $600,000

= $127,104 profit