On January 1, 2018, Wildhorse Corporation signed a 5-year noncancelable lease fo

Question

On January 1, 2018, Wildhorse Corporation signed a 5-year noncancelable lease for equipment. The terms of the lease called for Wildhorse to make annual payments of $209000 at the beginning of each year for 5 years beginning on January 1, 2018 with the title passing to Wildhorse at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Wildhorse uses the straight-line method of depreciation for all of its fixed assets. Wildhorse accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $886101 at an effective interest rate of 9% In 2019, Wildhorse should record interest expense of $42129 $47614 $66424. $60939

Explanation / Answer

Date Cash payment Interest expense Reduction in lease liability Lease liability Jan-1-18 886101 Jan-1-18 209000 209000 677101 Jan-1-19 209000 60939 148061 529040 Jan-1-20 209000 47614 161386 367654 Option 2 $47614 is correct

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