On January 1, 2017, X-Man Corp.signed a ten-year non-cancellable lease for new machinery.The terms of the lease called for X-Man to make annual payments of $100,000 at the end of each year for ten years, with title to pass to X-Man at the end of the lease period.X-Man accordingly accounted for this lease transaction as a finance lease.The machinery has an estimated useful life of 15 years and no residual value.X-Man uses straight-line depreciation for all of its property, plant and equipment.The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%.It was also determined that the fair value of the machinery on January 1, 2017 was $674,000.
With respect to this lease, for the year ending December 31, 2017, X-Man should report (rounded to the nearest dollar)
A)lease expense of $100,000, and depreciation expense of $44,734.
B)interest expense of $53,681 and depreciation expense of $67,101.
C)interest expense of $53,681 and depreciation expense of $44,734.
D)interest expense of $53,920 and depreciation expense of $44,933.

Question

Quizplus · Accepted Answer

The interest expense for the first year is calculated as 8% of the present value of the lease ($671,008), which equals $53,681. The depreciation expense is calculated by dividing the present value of the lease ($671,008) by the useful life of the machinery (15 years), resulting in $44,734.