Question

Happy Corporation leased a building from Sensor Company. The 10-year lease is recorded as a capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line method is used to calculate depreciation. Which of the following statements is true?
a. Depreciation expense of $6,710 will be recorded each year.
b. Depreciation expense of $10,000 will be recorded each year.
c. No depreciation expense will be recorded by Happy Corporation.
d. No interest expense will be recorded by Happy Corporation.

Answer 1

Answer:

a. Depreciation expense of $6,710 will be recorded each year.

Explanation:

Data provided in the question

The capital lease period = 10 years

Annual payments = $10,000

Recorded cost of the asset = $67,100

So by considering the above information, we have to find out the depreciation expense for each year by

= Recorded cost of the asset ÷ Capital lease period

= $67,100 ÷ 10 years

= $6,710

Hence, the correct option is a.