Question

On January 2, 2021, Ivanhoe, Inc. signed a 10-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $320000 starting at the beginning of the first year, with title passing to Ivanhoe at the expiration of the lease. Ivanhoe treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Ivanhoe uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1966261, based on implicit interest of 10%.In its 2021 income statement, what amount of interest expense should Ivanhoe report from this lease transaction?

Answer 1

interest expense: $ 164,621.65

Step-by-step explanation:

We solve for the present value of the lease value:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 320,000.00

time 10

rate 0.1

`320000 * (1-(1+0.1)^(-10) )/(0.1) = PV\\`

PV $1,966,261.4738

We made the first payment which decrease our payable:

1,966,261.47 - 320,000 = 1,646,261.47‬

And now, from this amount we solve for the interest expense:

And now, we calculate the 10% interest for the year:

1,646,216.47 x 10% = 164,621.65 interest expense