On January 2, 2004, Grant, Inc. signed a 10 year non-cancelable lease for a heav

Question

On January 2, 2004, Grant, Inc. signed a 10 year non-cancelable lease for a heavy drill press. the lease stipulated annual payments of $40,000 starting at the end of the first year, with title passing to Grant at the expiration of the lease. Grant treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Grant uses straight-line depreciation for all of its fixed assets. Aggregate lease payments were determined to have a present value of $240,000, based on implicit interest of 10%. In its 2004 income statement, what amount of interest expense should Grant report from this lease transaction?Question 4 options:
a. $0 b.$15,000 c. $20,000 d. $24,000
please show work

Explanation / Answer

Amount of Interest Expense would be 10% of the Present Value all aggregate lease payments = 10% of 240,000= $24,000 Hence, amount of interest expense is d. 24,000.

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