B is corrent. Per ASC Topic 840, a lessee’s capital lease will incur interest expense. Interest expense, $20,130, is the carrying value of the lease obligation multiplied by the effective interest rate ($201,302 x 10%). Additionally, the cost of the equipment is depreciated over the life of the asset rather than the life of the lease since title automatically passes to the lessee at the end of 10 years and the lessee will own the asset. Depreciation expense, $13,420, is the cost of the equipment depreciated over 15 years ($201,302/15 years). One difficulty with this question is whether there was a $30,000 payment on January 1, year 1. If so the interest expense would have been $17,130 [($201,302 – $30,000 x 10%)]. There is no interest expense given in that amount. Therefore we must assume an ordinary annuity.
A is incorrect. Per ASC Topic 840, a lessee’s capital lease will incur interest expense. Interest expense, $20,130, is the carrying value of the lease obligation multiplied by the effective interest rate ($201,302 x 10%). Additionally, the cost of the equipment is depreciated over the life of the asset rather than the life of the lease since title automatically passes to the lessee at the end of 10 years and the lessee will own the asset. Depreciation expense, $13,420, is the cost of the equipment depreciated over 15 years ($201,302/15 years). One difficulty with this question is whether there was a $30,000 payment on January 1, year 1. If so the interest expense would have been $17,130 [($201,302 – $30,000 x 10%)]. There is no interest expense given in that amount. Therefore we must assume an ordinary annuity.
C is incorrect. Per ASC Topic 840, a lessee’s capital lease will incur interest expense. Interest expense, $20,130, is the carrying value of the lease obligation multiplied by the effective interest rate ($201,302 x 10%). Additionally, the cost of the equipment is depreciated over the life of the asset rather than the life of the lease since title automatically passes to the lessee at the end of 10 years and the lessee will own the asset. Depreciation expense, $13,420, is the cost of the equipment depreciated over 15 years ($201,302/15 years). One difficulty with this question is whether there was a $30,000 payment on January 1, year 1. If so the interest expense would have been $17,130 [($201,302 – $30,000 x 10%)]. There is no interest expense given in that amount. Therefore we must assume an ordinary annuity.
D is incorrect. Per ASC Topic 840, a lessee’s capital lease will incur interest expense. Interest expense, $20,130, is the carrying value of the lease obligation multiplied by the effective interest rate ($201,302 x 10%). Additionally, the cost of the equipment is depreciated over the life of the asset rather than the life of the lease since title automatically passes to the lessee at the end of 10 years and the lessee will own the asset. Depreciation expense, $13,420, is the cost of the equipment depreciated over 15 years ($201,302/15 years). One difficulty with this question is whether there was a $30,000 payment on January 1, year 1. If so the interest expense would have been $17,130 [($201,302 – $30,000 x 10%)]. There is no interest expense given in that amount. Therefore we must assume an ordinary annuity.
|
