ExpertHard1 markMultiple Choice
CPA · Question 39 · Area II: Technical Accounting
A lessee enters into a Finance Lease. <br/>- Annual payments: $10,000 (due at end of year)<br/>- Lease term: 5 years<br/>- Discount rate: 5%<br/>- PV of payments: $43,295<br/><br/>What is the total expense to be recognized in Year 1?
A lessee enters into a Finance Lease. <br/>- Annual payments: $10,000 (due at end of year)<br/>- Lease term: 5 years<br/>- Discount rate: 5%<br/>- PV of payments: $43,295<br/><br/>What is the total expense to be recognized in Year 1?
Answer options:
A.
$10,000
B.
$10,824
C.
$8,659
D.
$12,165
How to approach this question
Finance Lease Expense = Amortization (Straight Line) + Interest (Effective Interest Method).
Full Answer
B.$10,824✓ Correct
Amortization of ROU Asset = $43,295 / 5 years = $8,659. Interest Expense = $43,295 * 0.05 = $2,165. Total Year 1 Expense = $10,824.
Common mistakes
Using straight-line rent expense (Operating Lease method).
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