Analyzing the Effects of Operating Lease Agreement on Lakeside Inc.
What is the impact of the operating lease agreement on Lakeside Inc.'s earnings for the first year?
Given data:
- Quarterly rent payments: $25,000 each
- Office building acquisition cost: $2 million
- Expected useful life of the building: 25 years
- No residual value
Answer:
The effect is an increase in net earnings of $20,000.
As in the given data, the impact on Lakeside Inc.'s earnings can be calculated based on a cost/benefit analysis.
Costs are incurred annually due to depreciation deduction for the office space acquired, while the benefit comes from the annual lease rentals.
Yearly rentals amount to $25,000 × 4 = $100,000
Yearly depreciation is calculated as $2,000,000 ÷ 25 = $80,000
Therefore, the increase in earnings can be determined as follows:
$100,000 - $80,000 = $20,000
From the calculation above, it is evident that earnings would increase, indicating that acquiring and leasing the office space may not have been a profitable deal for Lakeside Inc.