Question

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $172,076, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986

Answer 1

Answer: $35,477

Step-by-step explanation:

GIVEN the following ;

Equal annual payment = $172,076

Implicit rate( Pisa's known rate)= 8%

At 8%, 4 periods:

PV annuity due = 3.57710

PV ordinary annuity = 3.31213

At 10%,4 periods:

PV annuity due = 3.48685

PV ordinary annuity = 3.16986

Amount of interest expense recorded by Pisa Inc. will be calculated using the implicit rate ( rate known to Pisa Inc.) :

First we calculate the amount recorded at inception:

At year 0:

Annual payment × PV annuity due

$172,076 × 3.57710 = $615,533

Therefore, interest expense recorded by Pisa Inc. In first year is:

(Expense recorded at inception - annual payment) × Interest rate

$(615,533 - 172,076)× 0.08 =

$443,457 × 0.08

= $35,476.56 = $35, 477

Answer 2

$35,477

Step-by-step explanation:

We are given:

•Equal Annual repayments = $172,076

• Incremental borrowing rate = 10℅

• Implicit rate = 8℅

Since it is assumed the lease is properly classified as capital lease, to find the amount of interest expense recorded by pisa Inc. in the first year of asset's life, we have:

(Annual repayments) × (PV annuity due of 8%, 4 periods)=

= $172,076 * 3.57710 = $615,533

Therefore, calculating for the interest expense in the first year:

($615,533 - $172,076) × 8℅

= $443,457 × 0.08

= $35,476.56

= $35,477