Question

On January 1, 2020, Kerr Company signed a 10-year noncancelable lease for new equipment, requiring $20,000 annual payments at the beginning of each year. The equipment has a useful life of 15 years, with no salvage value. Title passes to Kerr at the lease expiration date. At the lease commencement, Kerr records a right-of-use asset and a lease liability of $126,000, based on an appropriate rate of interest. For 2020, Kerr should record amortization on its right-of-use asset of

Select one:
a. $20,000
b. $12,600
c. $8,400
d. $0

Answer 1

For 2020, Kerr Company should record amortization on its right-of-use asset of b. $12,600, which is calculated by dividing the initial value of the asset ($126,000) by the lease term (10 years).

Step-by-step explanation:

The student's question pertains to the calculation of amortization of a right-of-use asset for the year 2020, from a lease agreement signed by Kerr Company. Since the lease term is 10 years, and the right-of-use asset was recorded at $126,000, the straight-line method of amortization will be used. To calculate the annual amortization expense, divide the initial value of the right-of-use asset by the useful life of the lease term.

So, the annual amortization would be $126,000 / 10 years = $12,600 per year. Therefore, the correct answer is b. $12,600.