On May 1, 2020, Charles Corp

question 108

Multiple Choice

On May 1, 2020, Charles Corp. leased equipment to Darwin Inc. for one year under an operating lease. Instead of leasing it, Darwin could have bought the equipment from Charles for $ 800,000 cash. At this time, Charles's accounting records showed a book value for the equipment of $ 700,000. Depreciation on the equipment in 2020 was $ 90,000. During 2020, Darwin paid $ 22,500 per month rent to Charles for the 8-month period, and Charles incurred maintenance and other related costs under the terms of the lease of $ 16,000. The net income before income taxes reported by Charles from this lease for the year ended December 31, 2020, should be

• A) $ 74,000.
• B) $ 90,000.
• C) $ 164,000.
• D) $ 180,000.

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Definitions:

Current Liabilities

Obligations or debts that a company is expected to pay within one year, such as accounts payable and short-term loans.

Operating Cycle

The duration of time it takes for a company to buy inventory, sell it, and convert it back into cash.

Current Liabilities

Obligations or debts that a company must pay within a year.

Operating Cycle

The operating cycle is the duration of time it takes for a company to purchase inventory, sell it, and convert the sales into cash.