Reference no: EM132323985

Question

On January 1, 2017, a machine was purchased for $825,600 by Ayayai Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Pina Inc. on January 1, 2017, at an annual rental of $205,200. Other relevant information is as follows.

1. The lease term is for 3 years.

2. Ayayai Co. incurred maintenance and other executory costs of $25,600 in 2017 related to this lease.

3. The machine could have been sold by Ayayai Co. for $865,600 instead of leasing it.

4. Pina is required to pay a rent security deposit of $34,200 and to prepay the last month's rent of $17,100.

(a) How much should Ayayai Co. report as income before income tax on this lease for 2017?

(b) What amount should Pina Inc. report for rent expense for 2017 on this lease?