On January 1, Year One, AnnaLee Company buys a warehouse for $800,000 and is in the process of leasing it to Ziton Company for four out of its five year life. AnnaLee normally has an implicit rate of 10 percent whereas Ziton has an incremental borrowing rate of 8 percent. Assume the payment amounts have been computed appropriately. For these computations assume that the present value of $1 in four years at 8 percent annual interest is .72 and at 10 percent is .66. Assume that the present value of an ordinary annuity of $1 for four years at 8 percent annual interest is 3.27 and at 10 percent is 3.10. Assume that the present value of annuity due of $1 for four years at 8 percent annual interest is 3.55 and at 10 percent is 3.46. Payments are set to be $210,000 per year with the payments to begin immediately. The lessee has an option to buy the asset at the end of the lease for $70,000 which is viewed as a bargain. It is a direct financing lease. What is the total increase in net income that AnnaLee will report in Year One?

ANSWER IS A - ANY EXPLANATION

as I am working on this question ,some number doesnot seem right.

first, if you notice the cost is more than the sale price.even if we subtract the pv of unguaranteed residual (70,000) still we have a loss on the sale.

so i dont see any increase in net income for the lessor

and since the cost is not equal to the fv this has to be a "sale type lease"

if you found an explanation plz share it with us.

Thanks

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far july 6th 2009