Question

On January 1, 2021, Carla Vista Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Carla Vista to make annual payments of $195000 at the beginning of each year for 5 years beginning on January 1, 2021 with the title passing to Carla Vista at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Carla Vista uses the straight-line method of depreciation for all of its fixed assets. Carla Vista accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $813124 at an effective interest rate of 10%.

In 2022, Carla Vista should record interest expense of:________

a. $67994.
b. $48494.
c. $61812.
d. $42312.

Answer 1

In 2022, Carla Vista should record interest expense of:________

c. $61,812.

Step-by-step explanation:

a) Data and Calculations:

The Present Value (PV) of a 5-year noncancelable lease of equipment = $813,124

Annual lease payments = $195,000

Effective interest rate = 10%

Estimated lease term = 5 years

Estimated useful life of equipment = 7 years

Salvage value of equipment = $0

Method of Depreciation = Straight-line method

Lease period percentage = 71% (5/7)

Interest expense:

December 31, 2021 = $81,312 ($813,124 * 10%)

December 31, 2022 - $61,812 ($813,124 - $195,000 * 10%)