On January 1, 2014, Donna Company leased equipment by signing a five-year lease that required five payments of $30,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Donna does not guarantee any residual value. Using a rate of 8%, Donna capitalized the lease on January 1, 2014, in the amount of $119,781. What is the amount of interest expense Donna should report on its 2015 income statement?

Question

Quizplus · Accepted Answer

To calculate the interest expense, we need to use the interest method, which involves multiplying the lease liability balance (initially capitalized amount) by the interest rate.

Interest expense for 2015 can be calculated as follows:

Lease liability balance as of January 1, 2015:
$119,781 - $30,000 (payment made on December 31, 2014) = $89,781

Interest expense for 2015:
$89,781 x 8% = $7,182

Note that this is the interest expense for the year, not the total interest expense over the life of the lease (which would be $38,347).

On January 1, 2014, Donna Company Leased Equipment by Signing