On January 2, 2018, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 purchase option at the end of the lease. Nori is reasonably certain to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. For the year ended December 31, 2018, what amount should Nori recognize as amortization expense on the right-of-use asset?
A) $27,500
B) $30,000
C) $48,000
D) $46,000

Question

Quizplus · Accepted Answer

In a finance lease with a purchase option that is reasonably certain to be exercised, the lessee will control the asset for its entire useful life. Therefore, the amortization should be allocated over the 8-year life of the asset. $240,000 cost - 20,000 salvage value = 220,000 / 8 years = $27,500 per year.