Happy Corporation leased a building from Sensor Company.The 10-year lease is recorded as a capital lease.The annual payments are $10,000 and the recorded cost of the asset is $67,100.The straight-line method is used to calculate depreciation.Which of the following statements is true?
A) Depreciation expense of $6,710 will be recorded each year.
B) Depreciation expense of $10,000 will be recorded each year.
C) No depreciation expense will be recorded by Happy Corporation.
D) No interest expense will be recorded by Happy Corporation.

Question

Quizplus · Accepted Answer

Since the lease is recorded as a capital lease, Happy Corporation is considered the owner of the asset and must record depreciation expense on the leased asset. The annual rental payment of $10,000 is allocated between interest expense and reduction of the lease liability. The recorded cost of the asset, $67,100, is the amount that Happy Corporation will depreciate over the life of the lease. Using the straight-line method, the annual depreciation expense will be $6,710 ($67,100/10 years).

Happy Corporation Leased a Building from Sensor Company