At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Co

Question

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a ten-year lease agreement. The contract calls for quarterly lease payments of $27,000 each at the end of each quarter. The office building was acquired by Lakeside at a cost of $1 million and was expected to have a useful life of 25 years with no residual value. Lakeside seeks a 14% return on its lease investments. Appropriate adjusting entries are made quarterly. Respond to the question with the presumption that the guidance provided by the proposed Accounting Standards Update is being applied. Required: 1. What amounts related to the lease would LTT report in its balance sheet at December 31, 2016?

Explanation / Answer

As per the accounting standards, the lease which is given for less no. of years than its actual life and at the end of lease the asset goes back to the lesser than that lease is termed as Operational lease. Under operational lease , the lease payment made by the Lessee is treated as expense as whole.

So in our case , Lakeside Inc. has given property on lease to LTT Corporation for 10 years and after that property blongs to Lakeside Inc. only so this lease is operating lease and every lease payment will record as expense in the books of LTT.

So LTT will charges $ 27,000 X 4 = $ 108,000 in its profit & Loss account as lease expenses. and in balancesheet is just show a note that a leased property has been taken at $ 27,000 each quarter for 10 years out of which 9 years are left.

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