Question

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer.
The present value of the lease payments is $660,000.

The expected economic life of the asset is seven years.

The lease term is five years.

Using the straight-line method, what would West record as annual amortization?

Answer 1

Answer:

132,000$ will be recorded by west as amortization expense for the year.

Explanation:

Depreciation/amortization is systematic allocation of cost of asset over its useful life. In this case asset cost is not given so we assume that PV of lease payment is equal to market value (660,000 dollars) of asset.

In case of leased asset the useful life taken for calculation of depreciation is lower of 1) Useful life 2) Lease term as per applicable accounting standards.

So we have taken 5 years to charge depreciation on Straight line method.

Hence by dividing 660000 by five we get our answer.