Eddy leased equipment to Hoyle Company on May 1, 2008. At that time the collecti

Question

Eddy leased equipment to Hoyle Company on May 1, 2008. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2009. Hoyle could have bought the equipment from Eddy for $3,200,000 instead ofleasing it. Eddy's accounting records showed a book value for the equipment on May 1, 2008, of$2,800,000. Eddy's depreciation on the equipment in 2008 was $360,000. During 2008, Hoyle paid $720,000 in rentals to Eddy for the 8-month period. Eddy incurred maintenance and other related costs under the terms of the lease of $64,000 in 2008. After the lease with Hoyle expires, Eddy will lease the equipment to another company for two years.

7. IGNORING INCOME TAXES, the amount of expense incurred by Hoyle from this lease for the year ended December 31, 2008, should be A) $296,000. B) $360,000. C) $656,000. D) $720,000.

8. The income before income taxes derived by Eddy from this lease for the year ended December 31, 2008, should be A) $296,000. B) $360,000. C) $656,000. D) $720,000.

THANKS SO MUCH FOR ANY HELP. THE ANSWERS ARE D & A. I JUST NEED TO KNOW HOWS IT SOLVED.

Explanation / Answer

7)Expense =Lease payment made =$ 720000

correct option is "D"

8)Income before tax = rental income earned -depreciation -repair cost

                         = 720000 - 360000 - 64000 =$ 296000

correct option is "A"

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