Question

On January 1, 2018, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2018 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%.
Required:
1. In 2019, Sauder should record interest expense of ___________.

Answer 1

In 2019, Sauder should record interest expense of  $63,397.

Explanation:

• The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets.

• The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%.
• The easiest way to calculate the record interest expense is that to multiply a debt of a company by the average interest rate of its debts.

• Interest expense can be considered both as liability and also an asset.
• These items can be taken on the balance sheet, which can be completed from the accounting software.
• Interest occurred, but it has not been paid as according to the balance sheet date, it is referred to as the accrued interest. An interest rate that has incurred.
• In 2019, Sauder should record interest expense of $63,397.