On January 1, 2019, Greg Corporation signed a ten-year noncancelable lease for c
ID: 2527635 • Letter: O
Question
On January 1, 2019, Greg Corporation signed a ten-year noncancelable lease for certain machinery....
22. On January 1, 2019, Greg Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Greg to make annual payments of $22,000 at the end of each year for ten years with the title passing to Greg at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Greg uses the straight line method of depreciation for all of its fixed assets. Greg accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $134,202 at an effective interest rate of 8%. With respect to this capitalized lease, Greg should record for 2019 a. lease expense of $22,000 b. interest expense of $8,947 and depreciation expense of $7,614 c. interest expense of $10,736 and depreciation expense of $8,947 d. interest expense of $9,136 and depreciation expense of $13,420Explanation / Answer
Interest expense = Present value of lease payments * Effective interest rate
= 134,202 * 8%
= 10,736
In the case of title transfer, the asset has to be depreciated over the asset life.
The machinery has to be depreciated over 15 years.
Method of depreciation = Straight line
Depreciation expense = 134,202 / 15 = 8,947
The answer is C.