Question

The Pharmacy, Inc. has leased a building and determined that the lease should be classified as a capital / finance lease over the life of the 15 year lease. The present value of the lease payments is $900,000. The fair value of the building is $1,150,000. The governmental tax authority thinks that the building should be depreciated over 10 years because it qualifies for a special historical initiative. Monthly straight-line GAAP depreciation for the building is:

Select one:

a. $60,000

b. $90,000

c. $0

d. $7,500

e. $5,000

Answer 1

As per GAAP Present value of lease payments is amortised over the useful life of asset.

Useful life of asset is the shorter of the lease term (15 years) or the estimated life as per the Governmental authorities(10 years).

Therefore useful life is 10 years in given case.

ANNUAL DEPRECIATION AS PER GAAP= PRESENT VALUE OF LEASED PAYMENT/USEFUL LIFE

=$900,000/10

=$90,000

MONTHLY STARIGHT LINE DEPRECIATION = ANNUAL DEPRECIATION/ 12 MONTHS

=$90,000/12

=$7,500

ANSWER : D :$7,500