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Operating Lease for Lessee and Lessor

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On February 20,2007 Barbara Brent Inc., purchased a machine for $1,500,000 for the purpose of leasing it. The machine is expected to have a 10 year life, no residual value, and will be depreciated on the straight line basis. The machine was leased to Rudy Company on March 1, 2007, for a 4 year period at a monthly rental of $19,500. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Brent paid $30,000 of commissions associated with negoitating the lease in February 2007.

Instructions
a.) What expense should Rudy Company record as a result of the facts above for the year ended December 31, 2007? Show supporitng computations in good form

b.) What Income or loss before income taxes should Brent record as a result of the facts above for the year ended December 31, 2007? (Hint: Amortize commissions over the life of the lease.)

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Solution Summary

This solution prepares journal entries in an Excel file for Barbara Brent, Inc. and also determines the expenses, incomes and losses of the transactions ending in December 31st, 2007.

Solution Preview

For your convenience, I have attached a formatted MS Excel spreadsheet containing the information below.

Instructions
a.) What expense should Rudy Company record as a result of the facts above for the year ended
December 31, 2007?  Show supporting computations in good form.

Since the rights and risks of ownership of the machine have not been transferred in this transaction,
with only a rental occurring, this transaction meets the requirements of being a lease transaction,
during which both the lessee and lessor simply record the income and expense ...

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