Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost of $2 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)?

Answer 1

The effect is an increase in net earnings of $20,000.

Step-by-step explanation:

As in the above, the effect on Lakeside's earning is calculated on cost/benefit basis.

Costs are incurred annually due to getting the office space through depreciation deduction while benefit is for annual lease rentals.

Yearly rentals is $25,000 × 4 = $100,000

Yearly depreciation is $2,000,000 ÷ 25=$80,000

Increase in earnings is therefore ;

$100,000 - $80,000 = $20,000

Due to the above, it is evident that earnings would increase meaning that acquiring the office space and the leasing the office space to a lesse was not a profitable deal.