On January 1, 2011, a machine was purchased for $900,000 by Floyd Co. The machine is expected
Question:
On January 1, 2011, a machine was purchased for $900,000 by Floyd Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Crampton Inc. on January 1, 2011, at an annual rental of $180,000. Other relevant information is as follows.
1. The lease term is for 3 years.
2. Floyd Co. incurred maintenance and other executory costs of $25,000 in 2011 related to this lease.
3. The machine could have been sold by Floyd Co. for $940,000 instead of leasing it.
4. Crampton is required to pay a rent security deposit of $35,000 and to prepay the last month’s rent of $15,000.
(a) How much should Floyd Co. report as income before income tax on this lease for 2011?
(b) What amount should Crampton Inc. report for rent expense for 2011 on this lease?
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...
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