Calculation of Lease Amounts for Lessor for Manufacturer/dealer Leases with Unguaranteed

question 90

Essay

Calculation of lease amounts for lessor for manufacturer/dealer leases with unguaranteed residual value
Cow Co. is a farming equipment dealer who reports using IFRS. It plans to lease a piece of farming equipment to Horse Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows:
-It will be a 5 year lease and will have annual rental payments due at the beginning of the year.
-The rate of return Cow Co. wants to earn on the equipment is 7%.
-The estimated residual value (unguaranteed) is $ 10,000 (the present value of which is $ 7,130).
-The annual lease payments are $ 55,359 (the present value of which is $ 242,870); and
-The leased equipment has a $ 200,000 cost to the dealer, Cow Co.
Instructions
Calculate the gross investment, unearned interest income, sales revenue, cost of good sold and gross profit for Cow Co.

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Definitions:

Consent

Agreement or approval given freely and knowingly by a competent individual.

Interest

The cost of borrowing money, typically expressed as a percentage of the principal amount.

Capital Balances

The amount of money that owners have invested in a company, minus any withdrawals, often shown in the equity section of the balance sheet.

Net Income

A company's profit remaining after all expenses, taxes, and losses have been deducted.