A is corrent. At the inception of the lease on 1/1/Y1, the capitalized lease liability was $135,000. The first payment, also on 1/1/Y1, consisted entirely of principal and reduced the liability to $115,000 ($135,000 – $20,000). Therefore, year 1 interest expense is $11,500 ($115,000 x 10%).
B is incorrect. At the inception of the lease on 1/1/Y1, the capitalized lease liability was $135,000. The first payment, also on 1/1/Y1, consisted entirely of principal and reduced the liability to $115,000 ($135,000 – $20,000). Therefore, year 1 interest expense is $11,500 ($115,000 x 10%).
B is incorrect. At the inception of the lease on 1/1/Y1, the capitalized lease liability was $135,000. The first payment, also on 1/1/Y1, consisted entirely of principal and reduced the liability to $115,000 ($135,000 – $20,000). Therefore, year 1 interest expense is $11,500 ($115,000 x 10%).
D is incorrect. At the inception of the lease on 1/1/Y1, the capitalized lease liability was $135,000. The first payment, also on 1/1/Y1, consisted entirely of principal and reduced the liability to $115,000 ($135,000 – $20,000). Therefore, year 1 interest expense is $11,500 ($115,000 x 10%).
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