On May 1, 2017, a machine was purchased for $1,750,000 by Pomeroy Corp., a private company following ASPE. The machine is expected to have an eight-year life with no salvage value and is to be depreciated on a straight-line basis. The machine was leased to St. Isidor Inc. on May 1, 2017 at an annual rental of $450,000. Other relevant information is as follows.
1. The lease term is three years and the payments began May 1, 2017.
2. Pomeroy Corp. incurred repair and maintenance costs of $61,000 for the fiscal year ending December 31, 2017 related to this lease.
3. The machine could have been sold by Pomeroy Corp. for $1,850,000 instead of leasing it.
4. The stated interest rate in the lease is 10%.
Instructions
(a) Provide the basis for Pomeroy Corp.'s treatment of the lease as an operating lease.
(b) How much should Pomeroy Corp. report as income before income tax on this lease for 2017?
(c) What financial statement disclosures relative to this lease must be provided by Pomeroy at its December 31, 2017 year end?