Question

On January 1,2020 , Kerr Company signed a 10-year noncancelable lease for new equipment, requiring $20,000 annual paymentis 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 fease expiration date. At the lease commencement, Kerr records a right-of-use asset and a lease liabifity 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. $50

Answer 1

Tje correct answer is option c. Kerr Company should record annual amortization on its right-of-use asset by dividing the recorded asset value ($126,000) by the useful life of the equipment (15 years), resulting in an annual amortization of $8,400.

Step-by-step explanation:

The question pertains to the recording of amortization on a right-of-use asset related to a lease agreement for Kerr Company. The company has recorded a right-of-use asset and a lease liability of $126,000 at the commencement of a 10-year lease agreement. Given that the equipment has a useful life of 15 years and there is no salvage value, the straight-line method of amortization can be applied to calculate the annual amortization expense.

The annual amortization expense is determined by dividing the initial value of the right-of-use asset ($126,000) by the useful life of the equipment (15 years), resulting in an annual amortization of $8,400 ($126,000 ÷ 15 years). This calculation assumes that the expense will be recognized consistently over the useful life of the asset, which aligns with the straight-line method of depreciation and amortization.

Therefore, for the year 2020, Kerr should record amortization on its right-of-use asset of $8,400, which aligns with option c.