Operating Lease for Lessee and Lessor
Response to the following problem:
On February 20, 2014, Barbara Brent Inc., purchased a machine for $1,500,000 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Rudy Company on March 1, 2014, for a 4-year period at a monthly rental of $19,500. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Brent paid $30,000 of commissions associated with negotiating the lease in February 2014.
Instructions:
(a) What expense should Rudy Company record as a result of the facts above for the year ended December 31, 2014? Show supporting computations in good form.
(b) What income or loss before income taxes should Brent record as a result of the facts above for the year ended December 31, 2014? (Hint: Amortize commissions over the life of the lease.)