Use the following information for questions 65 and 66.
On January 1, 2014, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $90,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $375,289 at an effective interest rate of 10%.
-With respect to this capitalized lease, for 2015 Ogleby should record
A) interest expense of $28,529 and depreciation expense of $53,613.
B) interest expense of $37,529 and depreciation expense of $53,613.
C) interest expense of $22,382 and depreciation expense of $53,613.
D) interest expense of $31,382 and depreciation expense of $53,613.

Question

Quizplus · Accepted Answer

To calculate interest expense for the year 2015, we need to find the interest rate that was used to calculate the present value of minimum lease payments. This is given as 10%.

Therefore, interest expense for 2015 can be calculated as:
Interest expense = Beginning lease obligation x Interest rate
= ($375,289 - $90,000) x 10%
= $28,529

To calculate depreciation expense for the year 2015, we need to find the annual depreciation of the equipment. This can be calculated as:
Annual depreciation = (Total lease payments - Residual value) / Useful life
= ($90,000 x 5 - $0) / 7
= $64,286

Therefore, depreciation expense for 2015 can be taken as $64,286 / 2 (as it is for first year of lease period)

Depreciation expense for 2015 = $53,613

Hence, the correct choice for 2015 is C.

Use the Following Information for Questions 65 and 66