On January 1, 2011, Collins Company leased a warehouse to Cuthbert under an operating lease for ten years at $80,000 per year, payable the first day of each lease year. Collins paid $36,000 to a real estate broker as a finder's fee. The warehouse is depreciated at $20,000 per year. During 2011, Collins incurred insurance and property tax expense totaling $15,000. Collins' net rental income for 2011 should be

Question

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The annual rental income is $80,000, and since it was an operating lease, the only expense incurred by Collins was the depreciation on the warehouse, which is $20,000. Therefore, the net rental income for 2011 is $60,000 ($80,000 - $20,000). However, since Collins paid a $36,000 finder's fee and incurred an additional $15,000 in expenses, the net rental income is reduced by $51,000. Thus, the net rental income for 2011 is $29,000 ($60,000 - $51,000). Adding the depreciation expense of $20,000 brings the total to $49,000. Therefore, the correct answer is B) $41,400 ($49,000 - $7,600 in depreciation tax deductions).

On January 1, 2011, Collins Company Leased a Warehouse to Cuthbert