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

LTT will reduce its earnings by $156,000 due to the lease agreement, while Lakeside will increase its earnings by $164,000. The calculation of the interest expense or revenue for the second quarterly payment of the lease cannot be determined without additional information on the outstanding balance.

Step-by-step explanation:

The effect of the lease on LTT's earnings for the first year is calculated by multiplying the quarterly payments by the number of payments in the year. Since the lease calls for quarterly payments of $39,000 and there are four quarters in a year, LTT's earnings would be reduced by $39,000 * 4 = $156,000 for the first year.

Similarly, to find the effect of the lease on Lakeside's earnings for the first year, we consider the same number of periods and the quarterly payments, which for Lakeside is $41,000. The calculation would be $41,000 * 4 = $164,000. Lakeside's earnings would increase by $164,000 for the first year (ignoring taxes and other potential expenses).

To determine the interest expense the lessee would record in conjunction with the second quarterly payment, we would need to know the outstanding balance after the first payment. However, as this information is not provided, we cannot accurately calculate the interest expense without making additional assumptions. Typically, the interest expense would be calculated using the outstanding balance multiplied by the interest rate, prorated for the quarter.

The interest revenue the lessor would record in conjunction with the second quarterly payment is calculated similarly to the interest expense and would also depend on the outstanding balance and the terms of the lease.

Answer 2

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

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

Step-by-step 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).