Use the following information for questions 62 and 63.
On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $150,000 at the beginning of each year for five years with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $625,479 at an effective interest rate of 10%.
-In 2014, Sauder should record interest expense of
A) $47,548.
B) $87,453.
C) $62,547.
D) $102,453.

Question

Quizplus · Accepted Answer

Interest expense for a capital lease is calculated by applying the interest rate to the outstanding lease liability at the beginning of the period. Since payments are made at the beginning of each year, the first payment reduces the liability before interest is calculated, leaving the beginning liability at $625,479. However, for 2014, since the payment is made at the beginning of the period, there's no interest expense for that period. Interest expense is recognized in subsequent periods based on the outstanding liability, which decreases with each payment. The provided choices suggest a misunderstanding of how interest is calculated for the first year of a capital lease with payments at the beginning of the period.

Use the Following Information for Questions 62 and 63