On January 1, 2020, Dean Corporation signed a ten-year noncancelable lease for c

Question

On January 1, 2020, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $150,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,006,512 at an effective interest rate of 8%, with respect to this financing lease, Dean should record for 2020 Select one: a. lease expense of $150,000. b. interest expense of $80,521 and amortizaton expense of $67,101. c. interest expense of $67,101 and amortization expense of $57,102 d. interest expense of $68,522 and amortization expense of $100,652.

Explanation / Answer

Correct answer is B

8% Effective interest Decrease in Outstanding Date Payment Balance balance 1006512 12-31-2020 150000 80521 69479 937033 12-31-2021 150000 74963 75037 861996 12-31-2022 150000 68960 81040 780955 12-31-2023 150000 62476 87524 693432

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