Question

On January 2, 20X1, Cole Co. signed an eight-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of each year. The machine has a useful life of 12 years, with no salvage value. Title passes to Cole at the lease expiration date. Cole use straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 2, 20X1, of $108,000, based on an appropriate rate of interest. For 20X1, Cole should record amortization expense for the leased machine at:

Answer 1

The annual amortization expense for the leased machine with a present value of $108,000 over its 12-year useful life, using straight-line depreciation is $9,000 for the year 20X1.

Step-by-step explanation:

The question relates to the accounting treatment of a leased machine asset and the calculation of amortization expense for the first year (20X1). Since Cole Co. recorded the machine at its present value of $108,000, and given that the company uses the straight-line depreciation method, the annual amortization expense is simply the cost of the machine divided by the useful life. With a useful life of 12 years and no salvage value, the yearly amortization expense for the leased machine would be $108,000 / 12 = $9,000.

Answer 2

Cole should record amortization expense for the leased machine at $9,000.

Step-by-step explanation:

Machine cost would be recorded in book at = present value of Aggregate lease payments

Machine cost would be recorded in book at = $108,000

Depreciation (amortization) expense for the leased machine in first year= (Machine cost - salvage value)/Useful life

Depreciation (amortization) expense for the leased machine in first year= ($108,000 - 0)/12

Depreciation (amortization) expense for the leased machine in first year= $ 9,000

Therefore, Cole should record amortization expense for the leased machine at $9,000.