Lion Company Leased Equipment to Its Wholly Owned Subsidiary, Tiger

Multiple Choice

Lion Company leased equipment to its wholly owned subsidiary, Tiger, Inc., on July 1, 20X8. The lease is for a 10-year period, the useful life of the asset. The first of 10 equal annual payments of $600,000 was made on July 1, 20X8 and established a list selling price of $3,900,000 on the equipment. Assume that on July 1, 20X8, the present value of the rent payments over the lease term discounted at 12% was $3,797,000. The book value of the asset is $3,100,000. What is the profit on the sale that Lion should recognize on the consolidated financial statements for the years ended December 31, 20X8 and 20X9?

A) $800,000 and $0
B) $697,000 and $80,000
C) $80,000 and $80,000
D) $34,850 and $69,700