Kay Animal Hospital has leased a building.The 10-year lease is recorded as a finance lease.The annual payments are $10,000.The recorded cost of the asset is $67,100.The straight-line method is used to calculate depreciation.What is the effect on the company's records?

Question

Quizplus · Accepted Answer

Since the lease is recorded as a finance lease and the cost of the asset is recorded, the company will need to depreciate the asset over its useful life. The straight-line method is being used, so the annual depreciation expense will be the recorded cost of $67,100 divided by the useful life of 10 years, which equals $6,710 per year. Therefore, choice A is correct. No information is provided about any interest expense, so choices C and D can be eliminated. Choice B is incorrect because the annual payments are $10,000, but this is not the same as the annual depreciation expense.

Kay Animal Hospital Has Leased a Building