ABC INC.entered into a sales-type lease to lease JKL an asset that cost ABC INC. $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.ABC INC.used a 15 percent interest rate to compute the rentals.The dealer's profit (or loss)that ABC INC.recognized was:
A)$14,086 gain.
B)$18,000 gain.
C)$14,086 loss.
D)$80,000 gain.

Question

Quizplus · Accepted Answer

The dealer's profit in a sales-type lease is recognized at the inception of the lease and is calculated as the difference between the present value of the lease payments and the cost of the asset. Given the cost of the asset is $120,000 and the total lease payments amount to $200,000 ($40,000 annually for 5 years), the present value of these payments, discounted at the 15% interest rate, must be calculated to determine the profit. The correct calculation leads to recognizing a gain, and the closest to the correct present value calculation and the resulting profit is option A, $14,086 gain. This implies that the present value of the lease payments is higher than the cost of the asset, leading to a gain.

ABC INCEntered into a Sales-Type Lease to Lease JKL an Asset