DRM Corporation leased a piece of machinery on January 1,2020.At the date of signing the asset and lease obligation were recorded for $42,000.The first lease payment of $6,000 was due December 31,2020 and the interest rate they used in their calculations was 7%.The lease term was 10 years.Which of the following best describes what would be reported on DRM's Statement of Income for the year ending December 31,2020?

Question

Quizplus · Accepted Answer

The correct answer involves calculating both the interest expense and the depreciation expense for the year. The interest expense is calculated on the lease obligation at the beginning of the year (7% of $42,000 = $2,940). The depreciation expense is calculated by dividing the asset's value by the lease term (10 years), resulting in $4,200 ($42,000 / 10 years).

DRM Corporation Leased a Piece of Machinery on January 1,2020