Question

On January 1, 2021, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2021 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%.

In 2022, Sauder should record interest expense of:

a. $43,397.
b. $49,737.
c. $69,737.
d. $63,397.

Answer 1

The interest expense for Sauder Corporation in 2022 is $83,397.

Step-by-step explanation:

To calculate the interest expense for Sauder Corporation in 2022, we need to find the interest portion of the lease payment. The lease payments are $200,000 per year for a total of 5 years. The present value of these payments is given as $833,972 at an effective interest rate of 10%.

The interest portion of the payment in the first year can be calculated as:

Interest expense = Opening lease liability x Effective interest rate

Since this is the first year, the opening lease liability is equal to the present value of the lease payments, which is $833,972. The effective interest rate is 10%, so the interest expense for 2022 is $83,397.

Answer 2

d. $63397

Step-by-step explanation:

Principal outstanding after first payment at beginning of Jan 1 2021 =

833972 -200000 (does not include interest as first payment made at beginning)

= 633972

interest expense = 633972 *.10 = $ 63397.20