1. On January 1, 2020, Mill Corporation leased a machine to Ott Corporation for a five-year term at an annual rental of $50,000. On this date, Mill Corporation incurred legal fees of $1,000 related to the execution of the lease. The lease is appropriately classified as an operating lease by Mill Corporation. At the inception of the lease, Mill received $100,000, covering the first year's rent of $50,000 and a security deposit of $50,000. This deposit will not be returned to Ott upon expiration of the lease but will instead be applied to payment of rent for the last year of the lease. Mill Corporation calculated annual depreciation expense on the machine of $35,000, using the straight-line method.

What is the net profit (ignoring taxes) that Mill Corporation recognized on its 2020 income statement?

a. $24,000

b. $24,800

c. $14,800

2. Marne Company purchased a machine for leasing purposes on January 1, 2020, for $1,000,000. The machine has a 10-year life, has no residual value, and will be depreciated on a straight-line basis. On March 1, 2020, Marne leased the machine to Dal Company for $130,000 a year for a five-year period ending December 31, 2024, at which time, the machine reverts to Marne. Dal does not guarantee a residual value of the machine at lease-end, although Marne does plan to lease the equipment to Dal (or another company) for an additional 5 years. Dal paid $130,000 to Marne on January 2, 2020, the first annual lease payment. During the year ended December 31, 2020, Marne incurred normal maintenance and other related expenses of $1,000 under the provisions of this lease.

What was the income before income taxes derived by Marne from this lease for the year ended December 31, 2020?

a. $24,000

b. $21,500

c. $25,000