Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes)?

Question

Quizplus · Accepted Answer

Jacobs Eatery will have to pay $20,000 at the end of each of the 8 months of the lease term, resulting in a total expense of $160,000 over the 8-month period. The interest rate of 6% per annum is not relevant to calculating the monthly lease payments. Option A is incorrect because the total lease expense is spread over 8 months, not incurred as an initial expense. Option B is incorrect because the monthly payment is due at the end of each month, not at the beginning or middle of the lease term. Option D is incorrect as Jacobs Eatery has to pay the lease payments.

Jacobs Eatery Leased Restaurant Equipment from Gamma Leasing