Problem:
January 1, 2007 Nelson Company leases certain property to Queens Company at an annual rental of $60,000 payable in advance at the beginning of each year for 8 years. First payment received immediately. Leased property, which is new cost 275,000 and has an estimated economic life of 8 years and no residual value. Interest rate implicit in the lease is 12% and lease is noncancelable. Nelson company had no other costs associated with this lease. It should have accounted for this lease as a sales-type lease but mistakenly treated it as an operating lease.
Compute the effect on income before income taxes during the first year of the lease as a result of Nelson company classification of this lease as an operating lease rather than a sales-type lease.
I need to figure out the Incremental effect on income before income taxes
Sales
Less: Cost of goods sold
Gross margin
Add: Interest revenue
Incremental revenue recognized
Computation of the effect on income before income taxes using the operating lease method
Rental revenue
Depreciation expense
Incremental effect on income before income taxes
Rent revenue
Less: depreciation expense
Subtotal
Effect on income before income taxes
Income before income tases