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).
