On January 1, Gregory Company signed a ten-year noncancelable lease for a new machine, requiring $40,000 annual payments at the beginning of each year. The machine has a useful life of 15 years, with no salvage value. Title passes to Gregory at the lease expiration date. Gregory uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 1 of $252,000, based on an appropriate rate of interest. For the first year, Gregory should record depreciation (amortization) expense for the leased machine at
A) $40,000.
B) $25,200.
C) $16,800.
D) $14,133.

Question

Quizplus · Accepted Answer

The leased machine should be depreciated over its useful life of 15 years, not the lease term, because title passes to Gregory at the end of the lease. The present value of the lease payments is $252,000, so the annual depreciation expense is $252,000 / 15 = $16,800.

On January 1, Gregory Company Signed a Ten-Year Noncancelable Lease