Question

Exercise 21-13 On January 1, 2017, a machine was purchased for $982,400 by Coronado Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Whispering Inc. on January 1, 2017, at an annual rental of $224,400. Other relevant information is as follows. 1. The lease term is for 3 years. 2. Coronado Co. incurred maintenance and other executory costs of $26,300 in 2017 related to this lease. 3. The machine could have been sold by Coronado Co. for $1,022,400 instead of leasing it. 4. Whispering is required to pay a rent security deposit of $37,400 and to prepay the last month's rent of $18,700. (a) How much should Coronado Co. report as income before income tax on this lease for 2017? Income before income tax (b) What amount should Whispering Inc. report for rent expense for 2017 on this lease? Rent expenses LINK TO TEXT LINK TO TEXT

Answer 1

a) Calculation of Income before Income Tax

Income before Income Tax = [Revenues - Depreciation - Maintenance Costs]

= [224,400-(982,400/8)-26,300]

= [224,400-122,800-26,300]

= 75,300

Therefore, Income before income tax is 75,300

b) Calculation of Rent expense:

The rent expense for 2017 on this lease is the annual rental cost of 224,400

Therefore, the rent expense is 224,400.