At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for 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. What will be the effect of the lease on Lakeside’s earnings for the first year (ignore taxes)?

The effect is an increase in net earnings of $20,000.

Explanation:

As in the above, the effect on Lakeside's earning is calculated on cost/benefit basis.

Costs are incurred annually due to getting the office space through depreciation deduction while benefit is for annual lease rentals.

Yearly rentals is $25,000 × 4 = $100,000

Yearly depreciation is $2,000,000 ÷ 25=$80,000

Increase in earnings is therefore ;

$100,000 - $80,000 = $20,000

Due to the above, it is evident that earnings would increase meaning that acquiring the office space and the leasing the office space to a lesse was not a profitable deal.

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