Lakeside Inc. Lease Agreement Impact on Earnings

What will be the effect of the lease on Lakeside's earnings for the first year (ignore taxes)?

Lakeside increases its earnings by $__________,

Answer: $20,000

Explanation:

The effect of the lease on Lakeside's earnings will be the difference between the earnings from the lease and the cost of the building which will be depreciation.

Depreciation = 2,300,000/25

= $92,000 per year

Earnings per year;

= 28,000 * 4

= $112,000

Increase in earnings = 112,000 - 92,000

= $20,000

When Lakeside Inc. leased office space to LTT Corporation under a ten-year operating lease agreement with quarterly rent payments of $28,000 each, it had a clear impact on Lakeside's earnings for the first year. Despite the lease agreement, Lakeside's earnings increased by $20,000.

The increase in earnings can be attributed to the difference between the earnings generated from the lease and the cost of the building, which accounts for depreciation expenses. As per the information provided, the cost of the office building acquired by Lakeside was $2.3 million, with an expected useful life of 25 years and no residual value.

Calculating the depreciation expense for the building gives us $92,000 per year ($2,300,000 / 25). On the other hand, the total earnings generated from the lease for the first year amount to $112,000 ($28,000 quarterly rent payments * 4). Therefore, the increase in earnings resulting from this lease agreement is $20,000 ($112,000 - $92,000).

This increase in earnings is crucial for Lakeside Inc. as it showcases the positive impact of the lease agreement on its financial performance, contributing to the company's overall profitability and stability.