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On January 1, 2015, Sauder Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Sauder uses the straight-line method of depreciation for all of its fixed assets.Sauder accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
-In 2015, Sauder should record interest expense of

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On January 1, 2015, Sauder Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Sauder uses the straight-line method of depreciation for all of its fixed assets.Sauder accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
-In 2015, Sauder should record interest expense of

Quizplus · Accepted Answer

The interest expense for the first year is calculated by multiplying the present value of the lease payments ($208,493) by the interest rate (10%), which equals $20,849. However, since the payment is made at the beginning of the year, the interest for the first year is calculated on the remaining balance after the first payment, which is $208,493 - $50,000 = $158,493. Therefore, the interest expense is $158,493 * 10% = $15,849.

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