Reference no: EM131763452

Question - Operating lease

Kirby Co. purchased a machine on January 1, 2008, for $1,000,000 for the express purpose of leasing it. The machine is expected to have a five-year life, no salvage value, and be depreciated on a straight-line monthly basis. On April 1, 2008, under a cancelable lease, Kirby leased the machine to Harley Company for $300,000 a year for a four-year period ending March 31, 2012. Kirby incurred total maintenance and other related costs under the provisions of the lease of $15,000 relating to the year ended December 31, 2008. Harley paid $300,000 to Kirby on April 1, 2008.

Instructions [Assume the operating method is appropriate for parts (a) and (b).]

(a) Under the operating method, what should be the income before income taxes derived by Kirby Co. from this lease for the year ended December 31, 2008?

(b) What should be the amount of rent expense incurred by Harley from this lease for the year ended December 31, 2008?