Question

Company Inc. enters into a 10-year finance lease at the beginning of 2021 for a total of $250,000. The annual lease payment is $25,000 (payable at the end of each year) and the rate implicit in the lease is 5%. No initial direct costs are incurred. How much interest expense should be recognized in 2021?

Review Later
$9,930
$8,034
$8,871
$9,652

Answer 1

Explanation:

Transcribed image text: 8 Review Later Company Inc. enters into a 10-year finance lease at the beginning of 2021 for a total of $250,000. The annual lease payment is $25,000 (payable at the end of each year) and the rate implicit in the lease is 5%. No initial direct costs are incurred. How much interest expense should be recognized in 2021? $9,652 $8,034 $8,871 $9.930

Answer 2

Concept:

Finance Lease-

• A finance lease is a type of equipment lease in which the customer (or "lessee") rents an asset for the duration of its useful life.
• Finance leases are also known as capital leases.

Given:

• Years= 10 years
• Financial lease amount = 250000
• Annual lease payment = 25000 (payable at the end of each year)
• Rate = 5%
• Direct initial cost = NA

Find:

Indirect expense amount

Solution:

Step 1 -

Calculate the Present value of 25000 (5%,10 years)

Present Value = 25000 x 7.7217

Present Value = 193043.373

Step 2 -

Calculate the Indirect expense amount

Interest expense in 2021 = 193043.37 x 5%

Interest expense in 2021 = 9652.17

As a result, the interest expense that will be recognized in 2021 is 9652.17

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