Ollie Company entered into a lease agreement with Costello,Inc. ,to lease an asset that cost Ollie $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.Ollie's implicit rate on the lease is 15 percent. Ollie's dealer profit on this lease would be
A) $14,086 loss.
B) $14,086 gain.
C) $18,000 gain.
D) $80,000 gain.

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the lease payments using the implicit rate of 15%.

PV of lease payments = $40,000 x [(1 - 1/(1+0.15)^5)/0.15] = $140,865.99

Next, we need to calculate the cost of the asset to Ollie Company after considering the present value of the lease payments:

Cost of asset = $120,000 - $140,865.99 = -$20,865.99 (loss)

Since the cost of the asset is negative, Ollie incurred a loss on the transaction. However, we need to consider the dealer profit to determine the overall outcome for Ollie.

Dealer profit = Cost of asset + PV of lease payments - Cost of asset = $140,865.99 - (-$20,865.99) = $161,731.98

Therefore, Ollie's dealer profit on this lease would be a gain of $14,086.

Ollie Company Entered into a Lease Agreement with Costello,Inc