Question

Sandhill Co. leased equipment to Riggs Company on May 1, 2021. At that time the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Sandhill for $5400000 instead of leasing it. Sandhill’s accounting records showed a book value for the equipment on May 1, 2021, of $4700000. Sandhill’s depreciation on the equipment in 2021 was $590000. During 2021, Riggs paid $1164000 in rentals to Sandhill for the 8-month period. Sandhill incurred maintenance and other related costs under the terms of the lease of $108000 in 2021. After the lease with Riggs expires, Sandhill will lease the equipment to another company for two years.Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2021, should be

Answer 1

Riggs expense associate with the lease with Sandhill: $1,164,000

Step-by-step explanation:

As the lease is an operational lease Riggs will consider their entire payment as expense as the equipment is not being acquired through the lease contract.

We determinate the lease is operational because:

The equipment return to the owner (Sandhill) without even an option to purchase form the the lesee. Also, there is no possible renewal ofthe lease and last, the lease is not considered a sale of the asset