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Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2011.The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands.The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021.The first of 10 equal annual payments of $621,000 was made on July 1, 2011.Metro had purchased the equipment for $3,900,000 on January 1, 2011, and established a list selling price of $5,400,000 on the equipment.Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.
-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, 2011?

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The correct answer is A.The depreciation expense is calculated as the cost of the asset divided by the useful life. In this case, the cost of the asset is $4,500,000 and the useful life is 10 years. Therefore, the depreciation expense is $450,000 per year.The interest expense is calculated as the present value of the rent payments multiplied by the interest rate. In this case, the present value of the rent payments is $4,500,000 and the interest rate is 8%. Therefore, the interest expense is $360,000 per year.For the year ended December 31, 2011, Sands should record depreciation expense of $225,000 (6 months x $450,000) and interest expense of $155,160 (6 months x $360,000).

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