ExpertHard1 markMultiple Choice
CPA · Question 20 · Area III: Select Transactions
Phoenix Corp. leases office space under a 4-year lease with annual payments of $80,000 due at the beginning of each year. Phoenix's incremental borrowing rate is 8%. The present value of an annuity due of $1 for 4 periods at 8% is 3.5771.<br/><br/>If Phoenix classifies this as an operating lease, what is the total lease cost Phoenix will recognize in Year 1?
Phoenix Corp. leases office space under a 4-year lease with annual payments of $80,000 due at the beginning of each year. Phoenix's incremental borrowing rate is 8%. The present value of an annuity due of $1 for 4 periods at 8% is 3.5771.<br/><br/>If Phoenix classifies this as an operating lease, what is the total lease cost Phoenix will recognize in Year 1?
Answer options:
A.
$71,657
B.
$80,000
C.
$86,171
D.
$286,171
How to approach this question
For operating leases under ASC 842, calculate total lease payments over the lease term, then divide by the number of years for straight-line recognition. Operating leases have a single lease cost, not separate interest and amortization.
Full Answer
B.$80,000✓ Correct
Under ASC 842, operating leases recognize a single lease cost equal to the total lease payments divided by the lease term, recognized on a straight-line basis. Total payments = $80,000 × 4 = $320,000. Annual cost = $320,000 ÷ 4 = $80,000. Present value calculations are used for initial measurement but not for expense recognition.
Common mistakes
Using finance lease calculations (interest + amortization), using present value amounts for expense recognition, or not recognizing straight-line cost
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