Question

On January 1, 2021, Sandhill Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Sandhill to make annual payments of $208000 at the beginning of each year for 5 years beginning on January 1, 2021 with the title passing to Sandhill at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sandhill uses the straight-line method of depreciation for all of its fixed assets. Sandhill accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $867332 at an effective interest rate of 10%. In 2021, Sandhill should record interest expense of:______

a. $86733.
b. $65933.
c. $142067.
d. $121267.

Answer 1

b. $65,933

Step-by-step explanation:

Amount recognized as lease liability $867,332

Balance after first payment $659,332 ($867,332 - $208,000)

Interest expenses in 2022 $65,933

So, Sandhill should record interest expense of $65,933