At January 1, 2018, Butterfly, Inc. leased mining equipment from Diamond Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $540,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Diamond seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease.
Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Butterfly's earnings for the first year (ignore taxes)?
2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Butterfly (ignore taxes)?

Question

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The Answer of At January 1, 2018, Butterfly, Inc. leased mining equipment from Diamond Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $540,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Diamond seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease.
Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Butterfly's earnings for the first year (ignore taxes)?
2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Butterfly (ignore taxes)?