6. On 1/1/2018, Rolly Co leased a warehouse to Ahvi Co under an operating lease

Question

6. On 1/1/2018, Rolly Co leased a warehouse to Ahvi Co under an operating lease for ten years at $80,000 per year, payable the first day of each lease year. During 2018, the following events occurred for Rolly On 1/1/2018, paid $36,000 to a real estate broker as a finder's fee. Depreciated the warehouse at $20,000 per year. Incurred insurance and property tax expense totaling $15,000 Rolly's 2018 net rental income from this contract will be? A $ 9,000 B. $41,400 C. $44,000 D. $45,000 7, Lease Y does not contain a bargain purchase option but the lease term is equal to 90% of the estimated economic life of the leased property Lease Z does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property Both leases are non-cancelable. How should the lessee classify these leases? Lease Z Lease Y Operating lease Capital lease Capital lease Operating lease A. Capital lease B. Capital lease perating lease lease capital leases, executory costs incurred A Become part of the cost of leased assets B. Are expensed immediately upon payment C. Are deferred expenses until the end of the lease term D. All of the above are possble

Explanation / Answer

6. Net rental income = Rental per year - Payment for finder's fee - Depreciation of asset leased - Insurance

= $80000- 36000 - 20000 - 15000

= $9000

Ans is A.

7. A lease is classified as capital lease if any of the following conditions are satisfied:

Both the Lease Y and Lease Z satisfy the third condition.

Hence both should be classified as Capital Lease.

Ans is B.

8. The executory costs incurred by the lessee are always expensed as and when incurred.

Ans is B.

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