Lease Agreement Financial Statement Effects
What will be the effect of the lease on Lakeside's earnings for the first year?
At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement with quarterly rent payments of $25,000 each. The office building was acquired by Lakeside at a cost of $2 million and was expected to have a useful life of 25 years with no residual value.
Effect of the Lease on Lakeside's Earnings
The effect of the lease on Lakeside's earnings for the first year will be $0.
The effect of the lease on Lakeside's earnings for the first year can be calculated by subtracting the total expenses associated with the lease from the total rent received.
- Calculate the total expenses for the first year by multiplying the quarterly rent payments by the number of quarters in a year: $25,000 x 4 = $100,000.
- Calculate the total rent received for the first year by multiplying the quarterly rent payments by the number of quarters in a year: $25,000 x 4 = $100,000.
- The effect on Lakeside's earnings for the first year is the difference between the total rent received and the total expenses: $100,000 - $100,000 = $0.
The lease will have no effect on Lakeside's earnings for the first year.