Surplus Mining Company has leased a machine from Craft Machinery Company.The annual payments are $6,000 and the life of the lease is 8 years.It is estimated that the useful life of the machine is 9 years.How would Surplus Mining record the acquisition of the machine?
A) The machine would be recorded as an asset with a cost of $48,000.
B) The company would not record the machine as an asset but would record rent expense of $6,000 per year.
C) The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 8 years.
D) The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for 9 years.

Question

Quizplus · Accepted Answer

Surplus Mining Company should record the machine as an asset at the present value of the annual cash payments ($6,000) for the life of the lease (8 years). This is because they are leasing the machine and do not own it, so they should only record the portion of the lease payments that relates to the use of the machine during the lease term. The useful life of the machine (9 years) is not relevant in this case, as it is the life of the lease that determines the accounting treatment.

Surplus Mining Company Has Leased a Machine from Craft Machinery