Question

On January 1, 2021, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $220,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this lease, Dean should record for 2021.
a. lease expense of $220,000.
b. interest expense of $89,468 and depreciation expense of $76,136.
c. interest expense of $107,361 and depreciation expense of $89,468.
d. interest expense of $91,363 and depreciation expense of $134,202.

Answer 1

Answer:

c. interest expense of $107,361 and depreciation expense of $89,468.

Explanation:

The computation is shown below

The interest expense on lease is

= 8% of $1,342,016

= $ 107,361

ANd, the depreciation expense is  

= (present value of lease payments at the closing of 10 years) - (salvage value) ÷ life of the asset

= ($1,342,016 - $0) ÷ 15 years

 = $89,468

Hence, the option c is correct