Karla Salons leased equipment from Smith Co. on July 1, 2018, in a finance lease. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due each year beginning July 1, 2018. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $80,000.
- The total decrease in earnings (pretax) in Karla's December 31, 2018, income statement would be (ignore taxes):

Question

Quizplus · Accepted Answer

Interest expense: (10% × 1/2 year × [$80,000 ? 12,000]) = $3,400.
Amortization expense: ($80/10) × 1/2 year = $4,000.
$3,400 + 4,000 = $7,400.

Karla Salons Leased Equipment from Smith Co