Anchorby Company, an equipment manufacturer, leases equipment for 10 years. The cost value of the equipment is $100,000. The lease requires an annual payment of $25,000 at the beginning of each year. The interest rate implicit in the lease is 10%. The lease also includes an option to pay $600 at the end of the tenth year to purchase the asset, which the lessee is certain to exercise. Calculate the gross profit or loss reported at the time of the transfer of the equipment.

Question

Quizplus · Accepted Answer

The gross profit at the time of the transfer of the equipment can be calculated by considering the present value of the lease payments and the purchase option payment, subtracting the cost value of the equipment. The present value of the lease payments (annuity due since payments are at the beginning of each year) can be calculated using the formula for the present value of an annuity due: PV = P * [(1 - (1 + r)^-n) / r] * (1 + r), where P is the payment amount, r is the interest rate, and n is the number of periods. The present value of the purchase option payment is calculated using the formula for the present value of a single future amount: PV = F / (1 + r)^n, where F is the future amount.For the lease payments: P = $25,000, r = 10% or 0.10, n = 10. PV of lease payments = $25,000 * [(1 - (1 + 0.10)^-10) / 0.10] * (1 + 0.10) = $173,402.08.For the purchase option payment: F = $600, r = 10% or 0.10, n = 10. PV of purchase option = $600 / (1 + 0.10)^10 = $231.38.Total present value of payments = $173,402.08 (lease payments) + $231.38 (purchase option) = $173,633.46.Gross profit = Total present value of payments - Cost value of the equipment = $173,633.46 - $100,000 = $73,633.46.The correct answer is not directly listed, indicating a possible mistake in the calculation or interpretation of the choices. Given the choices, the closest match or intended answer might have been misstated, but the process described should lead to understanding how to calculate the gross profit or loss from the lease agreement.

Anchorby Company, an Equipment Manufacturer, Leases Equipment for 10 Years