The Bright Future of Lakeside Inc.: A New Lease Agreement
What will be the impact of the new lease agreement on Lakeside's earnings?
At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a eight-year operating lease agreement with quarterly rent payments of $29,000 each. The office building was acquired by Lakeside at a cost of $2.4 million and was expected to have a useful life of 30 years with no residual value.
Impact of Lease Agreement on Lakeside's Earnings
The effect of the lease on Lakeside's earnings in the first year of the lease is an increase in net earnings of $36,000.
Explanation:
The new lease agreement with LTT Corporation presents a positive outlook for Lakeside Inc.'s financial performance. With quarterly rent payments of $29,000 each, Lakeside stands to gain a total of $116,000 annually from the lease agreement.
On the other hand, the acquisition cost of the office building at $2.4 million translates to a yearly depreciation expense of $80,000 ($2.4 million divided by 30 years). Despite this depreciation charge, the net effect on earnings is an increase of $36,000. This implies that the lease agreement is profitable for Lakeside and contributes positively to its financial performance.
The higher net earnings demonstrate the value of acquiring the office space and subsequently leasing it out, showcasing a promising future for Lakeside Inc. with this new lease agreement.