Question

On January 1, 2018, 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. The equipment 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 for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%.

With respect to this lease, for 2018 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

Show all work including formulas

Answer 1

With respect to this lease, for 2018 Ogleby should record interest expense of $57,058 and depreciation expense of $107,225. The right answer is c

Step-by-step explanation:

According to the given data we have the following:

PV of lease=$750,578

Annual payment=$180,000

Rate of interesr=10%

The interest expense would be calculated as follows:

Interest expense = ( PV of lease - Annual payment ) * Rate of interest

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

Interest expense = $57,058

Therefore, With respect to this lease, for 2018 Ogleby should record interest expense of $57,058 and depreciation expense of $107,225.