Question

On January 1, 2021, Blossom Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Blossom to make annual payments of $170000 at the beginning of each year for 5 years with title passing to Blossom at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Blossom uses the straight-line method of depreciation for all of its fixed assets. Blossom accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $708878 at an effective interest rate of 10%.In 2021, Blossom should record interest expense of $_____.

Answer 1

Answer:

The interest expense is $53887.8

Explanation:

Given the annual payment made by Blossom in the beginning of the year is $17000.

The interest expense have to determined:

The present value of lease payment = $708878

The payment made on the beginning of year = $170000

Outstanding principal amount as on 31 december 2021, 708878 – 170000 = $538878

Given effective interest rate is 10%

Now calculate the interest expense.$\text{Interest expense} = 538878 \times 10 \ percent = 53887.8 dollars.$