Question

Franklin, Inc. leased equipment from Juniper Co. on December 31, 2018. The lease meets the criteria of a finance lease under the new lease accounting standard. The lease requires annual payments of $150,000 due on December 31 of each year, beginning December 31, 2018. The present value of the lease payments is $1,020,000. The interest rate implicit in the lease is 8%. Of the payment due on December 31, 2019, how much will Franklin record as interest expense? (Round to the nearest dollar.)

$81,600

$76,600

$69,600

$57,600

Answer 1

	Present Value of the Lease	$                10,20,000
	First payment is made at initial	$                -1,50,000
	Net value of the lease	$                  8,70,000
	Interest will be charges on Net value after payment of $ 150,000
	So interest = $ 870,000 X 8% =	$                      69,600
	Answer = Interest due on December 31, 2019 = Option 3 = $ 69,600