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, and at the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and liability accounts have the following balances:

If, at the end of the lease, the fair value of the residual value is $8,800, what gain or loss should Geary record?

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, and at the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and liability accounts have the following balances:

If, at the end of the lease, the fair value of the residual value is $8,800, what gain or loss should Geary record?

Quizplus · Accepted Answer

To calculate the gain or loss, we need to compare the carrying value of the leased asset (cost - accumulated depreciation) with the fair value of the residual value guaranteed by the lessee.

Carrying value of leased asset = $43,200 - $10,800 = $32,400

Since the fair value of the residual value is $8,800 and the carrying value is $32,400, Geary would record a loss of $23,600 ($32,400 - $8,800). Therefore, the correct answer is option C, $7,200 loss.

Geary CoLeased a Machine to Dains Co