On January 1,Blalock Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000.The first payment was also made on January 1.Blalock appropriately treated this transaction as a capital lease.The ten lease payments have a present value of $405,000 at January 1,based on implicit interest of 10 percent.For the first year,Blalock should record interest expense of
A) $0.
B) $6,000.
C) $34,500.
D) $40,500.

Question

Quizplus · Accepted Answer

The interest expense for the first year can be calculated as (lease liability at the beginning of the year) x (implicit interest rate) = $405,000 x 10% = $40,500. Since the first payment was also made on January 1, the interest expense for the first year would be $40,500 - $60,000 (payment made) = -$19,500. However, Blalock should record a lower interest expense of $34,500, which is the total interest expense for the ten-year lease divided by ten years. This is because the interest expense for the first year is reduced by the amortization of the lease liability, which is the difference between the lease payment made and the interest expense recognized for the first year.

On January 1,Blalock Company as Lessee Signed a Ten-Year Noncancelable