You and a Colleague Are Reviewing a Prospective Lease Transaction

Essay

You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments.
Required: What will be the effect of the lease on MPK's earnings for the first year, and on the balance sheet at the end of the year (ignore taxes)? Journal entries are not required but might be helpful in your assessment. Round your answers to the nearest whole dollar amounts.