Maris Co. purchased a machine on January 1, 2011, for $1,000,000 for the express purpose of leasing

Question:

Maris Co. purchased a machine on January 1, 2011, for $1,000,000 for the express purpose of leasing it. The machine is expected to have a five-year life, no salvage value, and be depreciated on a straight-line monthly basis. On April 1, 2011, under a cancelable lease, Maris leased the machine to Dunbar Company for $300,000 a year for a four-year period ending March 31, 2015. Maris incurred total maintenance and other related costs under the provisions of the lease of $15,000 relating to the year ended December 31, 2011. Harley paid $300,000 to Maris on April 1, 2011.

Instructions

[Assume the operating method is appropriate for parts (a) and (b).]

(a) Under the operating method, what should be the income before income taxes derived by Maris Co. from this lease for the year ended December 31, 2011?

(b) What should be the amount of rent expense incurred by Dunbar from this lease for the year ended December 31, 2011?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...