Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a ten-year operating lease agreement. The contract calls for quarterly rent payments of $28,000 each. The office building was acquired by Lakeside at a cost of $2.3 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 Lakeside's earnings for the first year (ignore taxes)?

Lakeside increases its earnings by $__________

Answer 1

Answer: $20,000

Explanation:

The effect of the lease on Lakeside's earnings will be the difference between the earnings from the lease and the cost of the building which will be depreciation.

Depreciation = 2,300,000/25

= $92,000 per year

Earnings per year;

= 28,000 * 4

= $112,000

Increase in earnings = 112,000 - 92,000

= $20,000