Corry Corp. leased equipment from First Corp. under a 4-year lease requiring equal annual payments of...

Corry Corp. leased equipment from First Corp. under a 4-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Corry’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Corry, Inc.) is 8%. Assuming that this lease is properly classified as a finance lease, what is the amount of interest expense recorded by Corry in the first year of the asset’s life?

ANS: $70,953

Please explain why the answer is as is.

Solutions

Expert Solution

Step 1: Calculation of Present value of annuity due:
Beginning of the year 1	(1/1.08)^0	1
At the end of year 1 or at the beginning of the year 2	(1/1.08)^1	0.925926
At the end of year 2 or at the beginning of the year 3	(1/1.08)^2	0.857339
At the end of year 3 or at the beginning of the year 4	(1/1.08)^3	0.793832
Present value of annuity due		3.577097

Calculation of value of the asset:
Present value of annuity due	3.5771
1st installment of lease	344152
Value of the asset (3.577097*344152)	1231065

Calculation of Interest to be recorded in first year of asset life:
Value of the asset (3.577097*344152)	1231065
Less: First installment to be paid at the beginning of the lease	344152
Principal amount outstanding for the year one (1231065 - 344152)	886913
Implicit rate in the lease	8%
Interest to be recorded in first year of asset life: (886913*8%)	70953

ekkarill92 answered 1 year ago

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