Question

On December 31, Year One, the Sliyvoid Corporation leases a large machine for five years, its...

On December 31, Year One, the Sliyvoid Corporation leases a large machine for five years, its entire expected life. Depreciation is recorded using the straight-line method. Payments are $12,000 per year starting December 31, Year One, and every December 31 thereafter. The incremental borrowing rate is 10 percent per year. The present value of an annuity due at a 10 percent rate for five periods is $4.16987. The present value of an ordinary annuity at a 10 percent rate for five periods is $3.79079.

A. What is the interest expense to be recognized in Year Two?

A. $3,349

B. $3,804

C. $4,549

D. $5,004

B. What is the lease liability to be reported on the company's balance sheet at the end of Year Two?

A. $24,838

B. $29,842

C. $38,038

D. $43,042

Business   Accounting   
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Homework Answers

Answer #1
Initial lease liabity 50038 =12000*4.16987
Less: Payment on December 31, Year One 12000
Lease liability at the end of Year one 38038
A
Lease liability at the end of Year one 38038
X Interest rate 10%
interest expense to be recognized in Year Two 3804
Option B is correct
B
Lease liability at the end of Year one 38038
Less: Reduction of lease liability 8196 =12000-3804
Lease liability at the end of Year two 29842
Option B is correct
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