Surplus Mining Company has leased a machine from Craft Machinery Company.The annual payments are $6,000,and the life of the lease is eight years.It is estimated that the useful life of the machine is nine years.How would Surplus Mining record the acquisition of the machine?
A)The machine would be recorded as an asset with a cost of $48,000.
B)The company would not record the machine as an asset but would record rent expense of $6,000 per year.
C)The machine would be recorded as an asset,at the present value of the annual cash payments,$6,000 for eight years.
D)The machine would be recorded as an asset,at the present value of the annual cash payments,$6,000 for nine years.

Question

Quizplus · Accepted Answer

Since this is a lease, the machine is not owned by Surplus Mining Company and cannot be recorded as an asset with the full cost of $48,000. Instead, the machine should be recorded as an asset at the present value of the annual lease payments, which is $6,000 for eight years. This is because the useful life of the machine is estimated to be nine years, but Surplus Mining Company only has the right to use it for eight years under the lease agreement. Therefore, the lease payments should be discounted to their present value using the appropriate discount rate.

Surplus Mining Company Has Leased a Machine from Craft Machinery