Use the following information for questions 91 and 92.
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2015. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2025. The first of 10 equal annual payments of $552,000 was made on July 1, 2015. Metro had purchased the equipment for $3,500,000 on January 1, 2015, and established a list selling price of $4,800,000 on the equipment. Assume that the present value at July 1, 2015, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,000,000.
-Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2015?
A) $200,000 and $137,920
B) $200,000 and $160,000
C) $2,400,000 and $137,920
D) $2,400,000 and $160,000

Question

Quizplus · Accepted Answer

The depreciation expense is calculated as the present value of the lease payments ($4,000,000) divided by the lease term (10 years), resulting in $400,000 annually. For half a year (July 1 to December 31), it is $200,000. The interest expense for the first payment is calculated as the present value of the lease payments ($4,000,000) multiplied by the interest rate (8%), resulting in $320,000 annually. For half a year, it is $160,000. However, since the first payment reduces the principal, the interest for the remaining period is $137,920.

Use the Following Information for Questions 91 and 92