Question

Hull Co. leased equipment to Riggs Company on May 1, 2015. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2016. Riggs could have bought the equipment from Hull for $4,800,000 instead of leasing it. Hull’s accounting records showed a book value for the equipment on May 1, 2012, of $4,200,000. Hull’s depreciation on the equipment in 2015 was $540,000. During 2015, Riggs paid $1,080,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $96,000 in 2015. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. The income before income taxes derived by Hull from this lease for the year ended December 31, 2015, should be $984,000. $444,000. $540,000. $1,080,000.

Answer 1

Ans:Option 2.$ 444,000 is Correct Answer

Explanation:

Income before tax = rental income earned -depreciation -repair cost

                         = $1,080,000 - $540,000 - $96,000 =$ 444000