Mega Corporation leases machinery on January 1, 2016. The lease is for a period of 7 years, which is the useful life of the machinery. The implicit rate of interest is 10% and the Obligation under Capital Lease is recorded at $48,197. The lease requires annual payments of $9,000, with the first payment due at the inception of the lease. How much interest expense should be accrued on December 31, 2016?

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The interest expense for the first year is calculated on the lease obligation after the first payment. The initial obligation is $48,197, and after the first payment of $9,000, the remaining balance is $39,197. The interest for the year is 10% of $39,197, which is $3,920.

Mega Corporation Leases Machinery on January 1, 2016