On December 31,2016,Perry Corporation leased equipment to Admiral Company for a five-year period.The annual lease payment,excluding executory costs,is $40,000.The interest rate for this lease is 10%.The payments are due on December 31 of each year.The first payment was made on December 31,2016.The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000.For the year ended December 31,2016,by what amount will Perry's pretax earnings increase due to this lease?

Question

Quizplus · Accepted Answer

The lease payment is $40,000 per year, and the interest rate is 10%, so the implicit interest in the lease is $12,500 ($125,000 - $105,000). Therefore, Perry will recognize $27,500 ($40,000 - $12,500) of income related to the lease in 2016, which will increase its pretax earnings by $27,500.

On December 31,2016,Perry Corporation Leased Equipment to Admiral Company for a Five-Year