On January 1, Twix Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000. The first payment was also made on January 1. Twix appropriately treated this transaction as a capital lease. The ten lease payments have a present value of $405,000 at January 1, based on implicit interest of 10 percent. For the first year, Twix should record interest expense of
A) $0.
B) $6,000.
C) $34,500.
D) $40,500.

Question

Quizplus · Accepted Answer

The interest expense for the first year can be calculated using the effective interest method, which requires multiplying the lease liability at the beginning of the year by the implicit interest rate. The lease liability at the beginning of the year is the present value of the remaining lease payments, which is $405,000 minus the first payment of $60,000, or $345,000. The implicit interest rate is 10%. Therefore, the interest expense for the first year is $34,500.

On January 1, Twix Company as Lessee Signed a Ten-Year