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.