Question

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
Future Value of Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
1 1.00000 1.00000 1.00000 1.00000 1.00000
2 2.05000 2.06000 2.08000 2.10000 2.12000
3 3.15250 3.18360 3.24640 3.31000 3.37440
4 4.31013 4.37462 4.50611 4.64100 4.77933
5 5.52563 5.63709 5.86660 6.10510 6.35285
6 6.80191 6.97532 7.33592 7.71561 8.11519
7 8.14201 8.39384 8.92280 9.48717 10.08901
8 9.54911 9.89747 10.63663 11.43589 12.29969
9 11.02656 11.49132 12.48756 13.57948 14.77566
10 12.57789 13.18079 14.48656 15.93743 17.54874
Present Value of an Annuity Due of 1
Period 5% 6% 8% 10% 12%
 1 1.00000 1.00000 1.00000 1.00000 1.00000
 2 1.95238 1.94340 1.92593 1.90909 1.89286
 3 2.85941 2.83339 2.78326 2.73554 2.69005
 4 3.72325 3.67301 3.57710 3.48685 3.40183
 5 4.54595 4.46511 4.31213 4.16986 4.03735
 6 5.32948 5.21236 4.99271 4.79079 4.60478
 7 6.07569 5.91732 5.62288 5.35526 5.11141
 8 6.78637 6.58238 6.20637 5.86842 5.56376
 9 7.46321 7.20979 6.74664 6.33493 5.96764
10 8.10782 7.80169 7.24689 6.75902 6.32825
If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2021?
Amortization Expense and Interest Expense
Interest Expense
Lease Expense
Amortization Expense

Answer 1

Answer: Lease expense

Explanation:

Based on the information given in the question, if Alt accounts for the lease as an operating lease, the lease expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2021.

In operating lease, it should be noted that the lessee records lease for each year which he or she pays to the lessor as the lease rental. In this case, the correct option is lease expense.