Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a nine-year operating lease agreement. The contract calls for quarterly rent payments of $39,000 each. The office building was acquired by Lakeside at a cost of $3.4 million and was expected to have a useful life of 25 years with no residual value. What will be the effect of the lease on LTT’s earnings for the first year (ignore taxes)?LTT reduces it's earnings by $_______At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a eleven-year operating lease agreement. The contract calls for quarterly rent payments of $41,000 each. The office building was acquired by Lakeside at a cost of $3.6 million and was expected to have a useful life of 30 years with no residual value.What will be the effect of the lease on Lakeside’s earnings for the first year (ignore taxes)?Lakeside Increases it's earnings by _________A lease agreement calls for quarterly lease payments of $7,000 over a 10-year lease term, with the first payment at July 1, the lease’s inception. The interest rate is 12%. Both the fair value and the cost of the asset to the lessor are $167,000.What would be the amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1?Lease Decrease in Outstanding Payment Interest Decrease in Date July 1 July 1 October 1 balance balanceWhat would be the amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1?

Answer 1

Answer:

a.Lakeside's earnings will reduce  by $156,000

b. Lakeside's earnings will increase by $20,000.

Explanation:

The rental fee payment per quarter =$39,000.

The rental fee payment per year = $39,000 x 4 = $156,000

In this case, none of the classification criteria of a capital lease is met. Hence, the lease will be recorded as an operating lease and all the four quarterly payments will be recorded as rent expense by LLT. This will reduce LTT's earnings by $156,000.

Lakeside will record all the payments received from LTT as rent revenue since it is an operating lease. Also, because Lakeside is the owner of the asset, she will record depreciation on the asset too.

Thus,

Increase in lakeside's earnings = Rent revenue - Depreciation expense.

Rent revenue = $156,000

Depreciation expense = $3,400,000 / 25 = $136,000

Thus,

Lakeside's earnings will increase by $20,000 (that is , $156,000 - $136,000).