On February 20, 2017, Whispering Inc. purchased a machine for $1,497,600 for the

Question

On February 20, 2017, Whispering Inc. purchased a machine for $1,497,600 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 Metlock Company on March 1, 2017, for a 4-year period at a monthly rental of $17,900. 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. Whispering paid $28,320 of commissions associated with negotiating the lease in February 2017.

(a) What expense should Metlock Company record as a result of the facts above for the year ended December 31, 2017?

(b) What income or loss before income taxes should Whispering record as a result of the facts above for the year ended December 31, 2017? (Hint: Amortize commissions over the life of the lease.)

Explanation / Answer

Ans A

Expense should Metlock Company record as a result of the facts above for the year ended December 31, 2017

= Depreciation on Machine

= Cost/ Useful life

=$1497600 x10/120 months

= $ 124800(Ans).

Ans 2:

Income from lease before taxes= $ 17900*10-124800-28320

                                              = $ 25880

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