Question

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a finance lease. The cost of the asset is $124,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,400 at the end of 10 years. Using the straight-line method, what would Best record as annual amortization

Answer 1

$12120 is the annual amortization expense

Explanation:

The following formula is used to calculate the annual depreciation expense that will be recorded in the books of accounts

Depreciation = ( cost of the asset minus salvage value) divide by number of years.

Given data in the question: number of years = 10, cost of the asset = $124000, salvage value = $28000

Putting the figures in the formula,

Depreciation expense = ($124000 minus $28000) divide by 10

After solving, we get = $12120

Thus, annual depreciation expense = $12120