Question

On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.

In 2011, Sauder should record interest expense of
a. $15,849
b. $16,600
c. $10,700
d. $15,808.

Answer 1

a) 15,849

Step-by-step explanation:

($208,493 - $50,000) * .10 = $15,849

Interests expense is a non-operating expense shown on the income statement. Represents the interest payable on any borrowings.