Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a eight-year operating lease agreement. The contract calls for quarterly rent payments of $29,000 each. The office building was acquired by Lakeside at a cost of $2.4 million and was expected to have a useful life of 30 years with no residual value.
Required:
a. What will be the effect of the lease on Lakeside’s earnings for the first year (ignore taxes)? (Enter your answer in whole dollars.)

Answer 1

Answer:

The effect of the lease on Lakeside's earnings in the first year of lease is an increase in net earnings of $36000

Explanation:

The effect of the lease on Lakeside's earnings is in terms of costs/benefits.

Costs incurred yearly as a result of acquiring the office space by a way of depreciation charge while benefits relate to the yearly lease rentals.

Yearly lease rentals ($29000*4)       =$116000

Yearly depreciation($2400000/30)  =($80000)

Increase in earnings                               $36000

The fact that net earnings would increase shows that the acquiring the office space and subsequently leasing it out to a lesse were not worthwhile.