Exercise 21-14 On February 20, 2017, Teal Inc. purchased a machine for $1,402,80
ID: 341917 • Letter: E
Question
Exercise 21-14
On February 20, 2017, Teal Inc. purchased a machine for $1,402,800 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 Flint Company on March 1, 2017, for a 4-year period at a monthly rental of $19,700. 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. Teal paid $31,680 of commissions associated with negotiating the lease in February 2017.
(a) What expense should Flint Company record as a result of the facts above for the year ended December 31, 2017?
(b) What income or loss before income taxes should Teal record as a result of the facts above for the year ended December 31, 2017? (Hint: Amortize commissions over the life of the lease.)
Explanation / Answer
a) Since 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 and the lease term is not more than 75% of the economic life of asset (i.e. lease terms is 4 years and useful life of machine is 10 years) the lease will be considered as operating lease. As this is the operating lease, Flint Company will expense the lease payments as incurred:-
Monthly lease payments = $19,700
Total months for lease in year 2017 = 10 months (from march to december)
Total Rent Expense = $19,700 per month*10 months = $197,000
b) Total Rent Revenue for 2017 = $197,000
Amortization of Commission expense in 2017 = (Commission expense*10 months)/(12 months*4 year)
= ($31,680*10)/48 months = $6,600
Depreciation expense = (Cost of Machine/Life of machine in months)*Months in year 2017
= ($1,402,800/120 months)*10 months = $116,900
(Life of machine in months = 10 year*12 months = 120 months)
Calculation of Income before income taxes in the books of Teal (Amount in $)
Rent Revenue 197,000 Less: Commission amortized (6,600) Less: Depreciation Expense (116,900) Income from lease before taxes 73,500Related Questions
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