Question

Carla Vista Co. purchases land and constructs a service station and car wash for a total of $592500. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $670000 and immediately leased from the oil company by Carla Vista. Fair value of the land at time of the sale was $70500. The lease is a 10-year, noncancelable lease. Carla Vista uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Carla Vista at termination of the lease. A partial amortization schedule for this lease is as follows:

Payments Interest Amortization Balance
Jan 2 2018 510000.00
Dec. 31, 2018 $83000.15 $51000.00 $32000. 47 7999.85
Dec. 31, 2019 83000.15 47799.99 35200. 44 2799.69
Dec. 31, 2020 83000.15 44279.97 38720.18 404079.51

The total lease-related expenses recognized by the lessee during 2019 is:_______

Answer 1

$87,766.66

Explanation:

Computation of Lease related Expense Recognized by lessee in 2019

Depreciation Expense = (Total cost - Salvage value) / Estimated life

Depreciation Expense = $670,000 - $70,500 / 15

Depreciation Expense = $39,966.67

Interest Expense = $47,799.99

Total lease-related expenses = Depreciation Expense + Interest Expense

Total lease-related expenses = $39,966.67 + $47,799.99

Total lease-related expenses = $87,766.66