Question

On january 1, 2012, singhai ltd. signed a three-year lease on a delivery truck. the lease requires annual payments of $29,103, which are due at the end of each year. singhai’s managers computed the present value of the lease payments as $75,000 using an effective interest rate of 8%. singhai had to use capital lease accounting treatment for the truck. what was the total expense related to this lease during the fiscal year ended december 31, 2012?

Answer 1

The total lease expense for Singhai Ltd. for the fiscal year ended December 31, 2012 was $29,103, which included both the interest expense of $6,000 and the reduction of the lease liability of $23,103.

Step-by-step explanation:

Singhai Ltd. signed a three-year lease on a delivery truck and must use capital lease accounting treatment. The lease has annual payments of $29,103 and a present value of $75,000 calculated using an 8% interest rate. The total lease expense for the year ended December 31, 2012, includes both the interest expense and the reduction in the lease liability.At the start, the lease liability is $75,000. The interest expense for the first year is 8% of $75,000, which equals $6,000. The lease payment at the end of the year is $29,103, which would reduce the lease liability by the payment amount minus the interest expense ($29,103 - $6,000 = $23,103). Thus, the total lease expense for the year equals the interest expense plus the reduction of the lease liability ($6,000 + $23,103 = $29,103).