Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount of profit did SmithCo record at the commencement of the lease?

Question

Quizplus · Accepted Answer

Under the new ASU, the lessor recognizes profit at commencement of the lease as the difference between the present value of lease payments and the cost of the asset. Therefore, SmithCo will recognize profit of ($80,000 - $66,000) = $14,000. This profit will be recognized as a deferred profit and amortized over the lease term. The annual amortization expense will be $1,400 ($14,000/10), which will reduce the lease income recognized by SmithCo each year.

Carla Salons Leased Equipment from SmithCo on July 1, 2013