Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a ten-year operating lease agreement. The contract calls for quarterly rent payments of $27,000 each. The office building was acquired by Lakeside at a cost of $2.2 million and was expected to have a useful life of 25 years with no residual value.

What will be the effect of the lease on LTT’s earnings for the first year (ignore taxes)?

LT = _______ Its earnings by________

Answer 1

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Because none of the classification criteria is met, this is an operating lease. Accordingly,LTT will record a right-of-use asset and lease liability for the present value of the $27000 payments. Interest expense will be determined each quarter as the effective interest rate (lessor’s implicit rate) times the declining liability balance. Because it’s an operating lease, amortization of the right-of-use asset is a “plug” figure each period to cause the total of interest and amortization to be $27000 each quarter.

That total lease expense will reduce LTT’s earnings by $108000 each year