Question

At the beginning of 2021, Killion Co. leased furniture to GameStop under a ten-year operating lease agreement. The lease requires quarterly payments of $37,000 each. The furniture was acquired by Killion at a cost of $3.2 million and was expected to have a useful life of 25 years with no residual value. How will GameStop's net income be impacted by this lease?

Answer 1

Answer: The accounting treatment of an operating lease requires the lessee to recognize the lease payments as an expense on their income statement, which will reduce their net income.

In this case, the quarterly lease payments of $37,000 each will result in an annual lease expense of $148,000 ($37,000 x 4). Over the ten-year lease term, GameStop will pay a total of $1,480,000 in lease payments.

Since the lease is an operating lease, GameStop will recognize the lease expense on a straight-line basis over the lease term. Therefore, the annual lease expense will be $148,000, and GameStop's net income will be reduced by that amount each year.

The impact on GameStop's net income will depend on their other revenues and expenses. If the lease expense is a significant portion of their overall expenses, then it could have a material impact on their net income. However, if the lease expense is relatively small compared to their other expenses, the impact on their net income may be less significant.

Explanation: