Chapter 20, Problem 15E

Lease Income and Expense Reuben Company retires a machine from active use on January 2, 2019, for the express purpose of leasing it. The machine had a carrying value of $900,000 after 12 years of use and is expected to have 10 more years of economic life. The machine is depreciated on a straight-line basis. On March 2, 2019, Reuben leases the machine to Owens Company for $180,000 a year for a 5-year period ending February 28, 2024. Under the provisions of the lease, Reuben incurs total maintenance and other related costs of $20,000 for the year ended December 31, 2019. Owens pays $180,000 to Reuben on March 2, 2019. The lease was properly classified as an operating lease.

Required:

1. Compute the income before income taxes derived by Reuben from this lease for the calendar year ended December 31, 2019.

2. Compute the amount of rent expense incurred by Owens from this lease for the calendar year ended December 31, 2019.