Question

1. On January 1, 2021, Oriole Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Oriole to make annual payments of $191000 at the beginning of each year for 5 years beginning on January 1, 2021 with the title passing to Oriole at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Oriole uses the straight-line method of depreciation for all of its fixed assets. Oriole accordingly accounts for this lease transaction as a finance lease. The lease payments were determined to have a present value of $783567 at an effective interest rate of 11%.

In 2022, Oriole should record interest expense of

A. $65182

B. $72352

C. $44172

D. $51342

2. Sunland Corporation is a lessee with a finance lease. The asset is recorded at $1020000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $360000 at the end of 5 years, and a fair value of $130000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of amortization expense would the lessee record for the first year of the lease?

A. $204000

B. $111250

C. 178000

D. $132000

Answer 1

1.)		Amount $
	Lease Liability on January 1,2021	783,567
	Less: Payment on January 1,2021	191,000
	Lease laibility after payment on January 1,2021	592,567
	Interest Expense	$65,182	( 592,567 x 11% )
	Correct answer is option A ( i.e. $ 65,182 ).
2.)	Asset value	$ 1,020,000
	Lease Term	5 Years
	Amortization expense for first year of lease	$ 204,000	(1,020,000 / 5 )
	Correct answer is option A ( i.e. $ 204,000 )