Question

On January 1, 2021, Ogleby Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. Theequipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts forthis lease transaction as a finance lease. The lease payments were determined to have apresent value of $750,578 at an effective interest rate of 10%. 14. With respect to this lease, for 2021 Ogleby should record

a. rent expense of $180,000.
b. interest expense of $57,058 and amortization expense of $150,116.
c. interest expense of $57,058 and amortization expense of $107,225.
d. interest expense of $90,000 and amortization expense of $181,956.

Answer 1

With respect to this lease, for 2021 Ogleby should record interest expense of $57,058 and amortization expense of $107,225. The right answer is c

Step-by-step explanation:

According to the give data we have the following:

PV of lease=$750,578

First Payment=$180,000

In order to calculate the interest expense we would have to use the following formula:

Interest Expense = (PV of Lease - First Payment ) * Interest rate

Interest Expense = ($750,578 - $180,000) * 10%

Interest Expense = $57,058

Therefore, With respect to this lease, for 2021 Ogleby should record interest expense of $57,058 and amortization expense of $107,225