Problem:
Watts Co. purchased a machine on January 1, 2004, for $3,000,000 for the express purpose of leasing it. The machine is expected to have a six-year life, no salvage value, and be depreciated on a straight-line monthly basis. On April 1, 2004, under a cancelable lease, Watts leased the machine to Easton Company for $900,000 a year for a four-year period ending March 31, 2008. Watts incurred total maintenance and other related costs under the provisions of the lease of $50,000 relating to the year ended December 31, 2004. Easton paid $900,000 to Watts on April 1, 2004
Instructions [Assume the operating method is appropriate for parts 1 and 2.]
1. Under the operating method, what should be the income before income taxes derived by Watts Co. from this lease for the year ended December 31, 2004?
2.What should be the amount of rent expense incurred by Easton from this lease for the year ended December 31, 2004?