Mercury Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1,2014.The truck has a 14-year useful life.Title to the truck passes to Mercury at the end of the 12-year lease term.Mercury depreciates other similar trucks on the straight-line method with no salvage value.The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term.The interest rate implicit in the lease (which is known by the lessee)is 8%. How much depreciation and interest expense should Mercury record for 2015?
Depreciation Interest
Expense Expense
A) $7,803 $6,568
B) $6,686 $6,568
C) $6,686 $6,173
D) $7,830 $6,173

Question

Quizplus · Accepted Answer

To calculate the depreciation expense for 2015, we need to determine the annual depreciation expense for the truck. We can do this by dividing the capitalized cost by the useful life of the truck:

Annual depreciation = Capitalized cost / Useful life = $93,598 / 14 = $6,686

For the interest expense, we can use the interest rate implicit in the lease to calculate the interest component of the lease payment:

Interest expense = Lease liability at beginning of year x Interest rate = ($93,598 - $11,500) x 0.08 = $6,173

Therefore, the total expense for Mercury in 2015 would be $6,686 + $6,173 = $12,859. The correct answer is C.

Mercury Package Express Service Properly Capitalized at $93,598 a Large