On January 1, Gregory Company signed a ten-year noncancelable lease for a new ma
ID: 2450405 • Letter: O
Question
On January 1, Gregory Company signed a ten-year noncancelable lease for a new machine, requiring$40,000 annual payments at the beginning of each year. The machine has a useful life of 15 years, withno salvage value. Title passes to Gregory at the lease expiration date. Gregory uses straight-line depre-ciation for all of its plant assets. Aggregate lease payments have a present value on January 1 of$252,000, based on an appropriate rate of interest. For the first year, Gregory should record depreci-ation (amortization) expense for the leased machine ata.$40,000.b.$25,200.c.$16,800.d.$14,133
Explanation / Answer
Machine cost would be recorded in book at = present value of Aggregate lease payments
Machine cost would be recorded in book at = 252000
Depreciation (amortization) expense for the leased machine in first year= (Machine cost - salvage value)/Useful life
Depreciation (amortization) expense for the leased machine in first year= (252000-0)/15
Depreciation (amortization) expense for the leased machine in first year= $ 16,800
Answer
.c.$16,800.