Question

"CullumberCorporation is a lessee with a finance lease. The asset is recorded at $1140000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $420000 at the end of 5 years, and a fair value of $160000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of amortization expense would the lessee record for the first year of the lease?(A) $122,500(B) $144,000(C) $196,000(D) $228,000

Answer 1

option (A) $122,500

Step-by-step explanation:

Given:

Recorded assets = $1,140,000

Economic life = 8 years

lease term = 5 years

fair value at the end of 5 years = $420,000

Now,

The Amortization expense =
`\frac{\textup{assets value - fair value }}{\textup{economic life}}`

or

The Amortization expense =
`\frac{\textup{1140000-160000}}{\textup{8}}`

or

The Amortization expense = $122,500

Hence, the correct answer is option (A) $122,500