Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $7,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $46,813. Collection of all lease payments is reasonably assured. What is the amortization of the right-of-use asset recorded in 2019 and 2020, respectively?
A) $7,000; $2,737
B) $4,676; $4,676
C) $4,480; $2,520
D) $5,033; $4,480

Question

Quizplus · Accepted Answer

The right-of-use asset is amortized on a straight-line basis over the lease term. The initial right-of-use asset is the present value of lease payments plus initial direct costs. The present value of lease payments is calculated using the lessee's incremental borrowing rate. The amortization expense for each year is the total right-of-use asset divided by the lease term.

Nace Manufacturing Company Leased a Piece of Nonspecialized Equipment for Use