On January 1, 2013, Martin Corporation signed a ten-year noncancelable lease for

Question

On January 1, 2013, Martin Corporation signed a ten-year noncancelable lease for machinery. The terms of the lease called for Martin to make annual payments of $250,000 at the end of each year for ten years with title to pass to Martin at the end of this period. The amchinery has an estimated useful life of 20 years and no salvage value. Martin uses the straight-line method of depreciation for all of its fixed assets. Martin accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,840,023 at an effective interes rate of 6%. With respect to this capitalized lease, Martin should record for 2013:

a) Depreciation expense of $184,002 and interes expense of $150,000

b) Depreciation expense of $92,001 and interest expense of $110,401

c) Depreciation expense of $184,02 and interest expense of $110,401

d) Lease expense of $250,000

Explanation / Answer

B) Depreciation expense of $92,001 and interest expense of $110,401.

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