[WanderingAcct]

I am hoping someone can help me with this. I was reviewing my Becker text and came across this example of calculating the income on an operating lease. After reading the example and preparing some journal entries for my own notes, I got a bit confused…

“Jodel Company purchased a machine on Jan 1, Year 1 for $1,500,000 with an expected life of 10 years from the date of purchase. There is on residual value, and it is to be depreciated on the straight line method. On January 1, Year 1, Lynn Company leased the machine from Jodel for 3 years at a monthly rate of $32,000. In addition, Lynn paid a lease bonus of $75,000.

What amount of related income on this operating lease should Jodel Company report for the year ending December 31, Year 1?

Monthly rentals ($32,000 x 12) = $384,000

Plus: Lease bonus amortization ($75,000 x 1/3) = $25,000

Less: Depreciation ($1,500,000/10 years) = ($150,000)

Income from leased asset, Year 1 = $259,000″

The journal entries I came up with:

DR Cash 384,000

CR Rental Income 384,000

DR Unearned Rental Income (Lease Bonus) 25,000

CR Rental Income 25,000

DR Depreciation Expense 150,000

CR Accumulated Depreciation 150,000

---

According to my journal entries there is $409,000 of Rental Income and $150,000 of Depreciation Expense. Yet the example calculates income to be reported as $259,000. Does the Income Statement actually show operating lease income net of depreciation expense, hence the $259,000 answer? Or are the the rental income and depreciation expense shown gross separately (and this example is just showing you how you could calculate the net income on the operating lease)?

Thanks for anyone’s help!

FAR - 99 (5/14)
AUD - 89 (8/14)
REG - 93 (4/15)
BEC - 5/18/15

NINJA Framework: Ninja Notes & Becker

[MustPass1988]

You have to net the rental income and depreciation expense together to get the income. I think you're overthinking this question based on the journal entries. It's kind of like thinking about the items that go into calculating the cost of inventory (i.e. insurance, shipping, cost of inventory). You wouldn't just include the income from the lease payments- you also have to include the depreciation of any lease bonus and deduct the depreciation of the leased asset.

AUD: PASSED [81]; Expired, retaking August 23rd
BEC: PASSED [83]; Expired, retaking July 11th
REG: PASSED [83]
FAR: FAILED [64]; Retaking May 23rd

[MustPass1988]

You have to net the rental income and depreciation expense together to get the income. I think you're overthinking this question based on the journal entries. It's kind of like thinking about the items that go into calculating the cost of inventory (i.e. insurance, shipping, cost of inventory). You wouldn't just include the income from the lease payments- you also have to include the depreciation of any lease bonus and deduct the depreciation of the leased asset.

AUD: PASSED [81]; Expired, retaking August 23rd
BEC: PASSED [83]; Expired, retaking July 11th
REG: PASSED [83]
FAR: FAILED [64]; Retaking May 23rd

[WanderingAcct]

Thanks. What you said helps. You are right that I am probably overthinking. I tend to do that sometime. 🙂

FAR - 99 (5/14)
AUD - 89 (8/14)
REG - 93 (4/15)
BEC - 5/18/15

NINJA Framework: Ninja Notes & Becker

[WanderingAcct]

Thanks. What you said helps. You are right that I am probably overthinking. I tend to do that sometime. 🙂

FAR - 99 (5/14)
AUD - 89 (8/14)
REG - 93 (4/15)
BEC - 5/18/15

NINJA Framework: Ninja Notes & Becker

[Author]

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