Nichols Fruits leased farm equipment from King Machinery on January 1, 2016. The

Question

Nichols Fruits leased farm equipment from King Machinery on January 1, 2016. The present value of the lease payments discounted at 10% was $40 million. Ten annual lease payments of $6 million are due at the beginning of each year beginning January 1, 2016. King had constructed the equipment recently for $33 million. With this lease agreement, control is considered to be transferred to the lessee at the beginning of the lease. What amount of profit did King record at the beginning of the lease?

            A)         $6 million.

            B)         $17 million.

            C)         $33 million.

            D)         $50 million.

Explanation / Answer

Answer is $7 million (no option for 7 million)

amount of profit did King record at the beginning of the lease =The present value of the lease payments discounted at 10% - Cost of equipment

=$40 million - $33 million

=$7 million

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