On January 1, 2014, a machine was purchased for $900,000 by Young Co. The machine is expected

Question:

On January 1, 2014, a machine was purchased for $900,000 by Young 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 St. Leger Inc. on January 1, 2014, at an annual rental of $210,000. Other relevant information is as follows.

1. The lease term is for 3 years.

2. Young Co. incurred maintenance and other executory costs of $25,000 in 2014 related to this lease.

3. The machine could have been sold by Young Co. for $940,000 instead of leasing it.

4. St. Leger is required to pay a rent security deposit of $35,000 and to prepay the last month’s rent of $17,500.

Instructions

(a) How much should Young Co. report as income before income tax on this lease for 2014?

(b) What amount should St. Leger Inc. report for rent expense for 2014 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...