The Roger Company leased a machine at the beginning of 2014. The machine was properly capitalized by Roger at $73,734.84. A lease payment of $16,563 is due at the end of each year. The expected life of the machine is seven years, and the term of the lease is five years. At the beginning of 2019, the machine will be returned to the lessor. Both Roger and the lessor use the straight-line method of depreciation. What amount of depreciation expense should Roger record in 2014 for the machine (round calculations up to the nearest dollar)?

Question

Quizplus · Accepted Answer

To determine the depreciation expense for 2014, we need to divide the capitalized cost of the machine (i.e., $73,734.84) by its expected life (i.e., 7 years). This gives us an annual depreciation expense of $10,533.55. However, since the lease term is only 5 years, we need to prorate this depreciation amount over the lease term. Thus, the depreciation expense for 2014 is:
$10,533.55 x (5/7) = $7,524.82
Therefore, the best choice is B, $14,747, which is the sum of the annual lease payment ($16,563) and the prorated depreciation expense ($7,524.82) for the first year of the lease.

The Roger Company Leased a Machine at the Beginning of 2014