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On January 2, 2017, Cambridge Ltd.signed a ten-year non-cancellable lease for a heavy-duty drill press.The lease required annual payments of $35,000, starting December 31, 2017, with title passing to Cambridge at the end of the lease.Cambridge is accounting for this lease as a capital (finance)lease.The drill press has an estimated useful life of 20 years, with no residual value.Cambridge uses straight-line depreciation for all its plant assets.The lease payments were determined to have a present value of $215,000, based on an implicit interest rate of 10%.
-On their 2017 income statement, how much depreciation expense should Cambridge report in connection with this lease?
A)$10,750
B)$17,500
C)$21,500
D)$35,000

Question

Quizplus · Accepted Answer

The correct answer is A because the depreciation expense for the first year of a capital lease is calculated by dividing the present value of the lease payments by the useful life of the asset. In this case, the present value of the lease payments is $215,000 and the useful life of the asset is 20 years, so the depreciation expense for the first year is $215,000 / 20 = $10,750.

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