Operating Lease Calculations on January 1, 2020, Lewis Corp. Purchased a Building for a Building

question 42

Essay

Operating lease calculations
On January 1, 2020, Lewis Corp. purchased a building for $ 900,000, with the intention of leasing it. The building is expected to have a 20 year life, no residual value, and will be depreciated on a straight-line basis. On April 1, 2020, under a cancellable lease, Lewis leased the building to Clark Company for $ 300,000 a year ($ 25,000 a month) for a four-year period ending March 31, 2024. Clark paid $ 300,000 to Lewis on April 1, 2020. During calendar 2020, Lewis incurred $ 30,000 in maintenance and other executory costs under the provisions of the lease. This lease is properly classified as an operating lease by both parties.
Instructions
a) How much income before income taxes will Lewis report from this lease for calendar 2020?
b) How much rent expense will Clark report in connection with this lease for calendar 2020?

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Definitions:

Financial Planning

The process of outlining how a business or individual will manage their finances to meet goals and objectives, involving budgeting, investments, retirement planning, and tax strategies.

Contingency Plans

strategies developed to mitigate the impact of unexpected events or emergencies.

Planned Growth

The strategic intent to increase a company's size, output, or market reach through predetermined actions.

Sustainable Rate Of Growth

The sustainable rate of growth is the maximum rate at which a company can grow its revenues, earnings, and dividends without increasing its financial leverage or equity capital.