Homer Co. leased equipment to Ratchet Company on May 1, 2018. At the time collectibility of the minimum lease payments are not reasonably predictable. The lease expireson May 1, 2019. Ratchet could have bought the equipment from Homer for $5,600,000 instead of leasing it. Homer's accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Homer's depreciation on the equipment in 2018 was $630,000. During 2018, Ratchet paid $1,260,000 in rentals to Homer for the 8-month period. Homer incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Ratchet expires, Homer will lease the equipment to another company for two years.

1. Ignoring income taxes, the amount of expense incurred by Ratchet from this lease for the year ended December 31, 2018, should be

a. $518,000

b. $630,000

c. $1,148,000

d. $1,260,000

2. The income before income taxes derived by Homer from this lease for the year ended December 31, 2018, should be

a. $518,000

b. $630,000

c. $1,148,000

d. $1,260,000