Torrey Co. manufactures equipment that is sold or leased. On December 31, 2015, Torrey leased equipment to Dalton for a five-year period ending December 31, 2020, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $550,000 (including $50,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2015. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $1,925,000, and cost is $1,500,000. For the year ended December 31, 2015, what amount of income should Torrey realize from the lease transaction?

Question

Quizplus · Accepted Answer

Torrey should realize income of $425,000 from the lease transaction for the year ended December 31, 2015. This is calculated by subtracting the cost of the equipment ($1,500,000) from the normal sales price ($1,925,000). The lease payments, including executory costs, and the transfer of ownership at the end of the lease term, indicate a sales-type lease, allowing for the recognition of profit at the inception of the lease.

Torrey Co Manufactures Equipment That Is Sold or Leased