Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1, at the beginning of the lease. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $30,000. What is the effect of the lease on the lessor's earnings during the first year (ignore taxes)? (Round your answer to the nearest whole dollar amount.)

Question

Quizplus · Accepted Answer

In a sales-type lease that includes selling profit, initial direct costs are expensed in the period of "sale" - that is, at the beginning of the lease. This assumes that in a sales-type lease the primary reason for incurring these costs is to enable the sale of the leased asset.
The lessor's earnings will be increased by $183,737 as calculated below: 11ea937b_35e6_5826_a419_6b9cb9c79b00_TB2599_00

Bird Leased Equipment That Had a Retail Cash Selling Price