On February 20, 2011, Hudson Inc. purchased a machine for $2,100,000 for the purpose of leasing it.
Question:
On February 20, 2011, Hudson Inc. purchased a machine for $2,100,000 for the purpose of leasing it. The machine is expected to have a 12-year life, has no residual value, and is depreciated on the straight-line basis to the nearest month. The machine was leased to Donah Company on March 1, 2011, for a 5-year period at a monthly rental of $34,000. Assume that the lease payments are made at the end of the month and that the appropriate interest rate is 11% compounded monthly. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Hudson paid $72,000 of commissions associated with negotiating the lease in February 2011.
1. What expense should Donah record as a result of the lease transaction for the year ended December 31, 2011?
2. What income or loss before income taxes should Hudson record as a result of the lease transaction for the year ended December 31, 2011?
Step by Step Answer:
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen