On January 1, 2010, Rachel Company leased equipment by signing a five-year lease that required five payments of $30, 000 due on December 31 of each year.The equipment remains the property of the lessor at the end of the lease, and Rachel does not guarantee any residual value.Using a rate of 7%, Rachel capitalized the lease on January 1, 2010, in the amount of $123, 006.What is the amount of interest expense Rachel should report on its 2011 income statement?

Question

Quizplus · Accepted Answer

To calculate interest expense for the first year, we need to use the beginning balance of the lease liability, which is $123,006, and the interest rate of 7%.

Interest expense for the first year = $123,006 x 7% = $8,610

Therefore, the correct answer is B) $8,610.

On January 1, 2010, Rachel Company Leased Equipment by Signing