On January 1, Rosewater Company leased a computer for 4 years at a monthly rent
ID: 2585173 • Letter: O
Question
On January 1, Rosewater Company leased a computer for 4 years at a monthly rent of $80, payable at the end of each month. Due to the rate of technical change, the computer is expected to become obsolete within 5 years. At the inception of the lease, the computer was retailing for $3,450. Had Rosewater chosen to purchase the computer instead of leasing it, they could have borrowed the funds at 10%. At a 10% interest rate, the present value of the lease payments is $3,154. Rosewater does not know the rate implicit in the lease. For the month of January, Rosewater should report (to the closest dollar) interest expense of A. $29 and rent expense of $80. B. $29 and depreciation expense of $58. C. $26 and depreciation expense of $66. D. $0 and rent expense of $80. On January 1, Rosewater Company leased a computer for 4 years at a monthly rent of $80, payable at the end of each month. Due to the rate of technical change, the computer is expected to become obsolete within 5 years. At the inception of the lease, the computer was retailing for $3,450. Had Rosewater chosen to purchase the computer instead of leasing it, they could have borrowed the funds at 10%. At a 10% interest rate, the present value of the lease payments is $3,154. Rosewater does not know the rate implicit in the lease. For the month of January, Rosewater should report (to the closest dollar) interest expense of A. $29 and rent expense of $80. B. $29 and depreciation expense of $58. C. $26 and depreciation expense of $66. D. $0 and rent expense of $80.Explanation / Answer
Solution: $26 and depreciation expense of $66.
Explanation:
$3,154 * 10% * (1 / 12 months) = $26
$3,154 / $3,450 = 91.4%
Because the lease agreement does not provides for transfer of ownership and not contains a bargain purchase option, thus the computers are depreciated over the lease term (4 years). Monthly depreciation expense will be computed as $3,154 / 48 months = 66