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On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Sauder uses the straight-line method of depreciation for all of its fixed assets.Sauder accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
-In 2012, Sauder should record interest expense of

Question

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The interest expense for the second year can be calculated by multiplying the beginning lease liability balance (present value of the minimum lease payments) by the effective interest rate. For year 2, the beginning lease liability balance would be $208,493 - $50,000 (payment made in year 1), which equals $158,493. Multiplying this by the effective interest rate of 10% gives an interest expense of $15,849. However, since only one year has passed, the interest expense for year 2 would be the portion of the interest cost that pertains to that year, which would be $15,849 * 2/5 (the remaining lease term) = $6,340. Therefore, the answer is B) $12,434.

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