Question

In: Accounting

1. The following information relates to B&B, Inc.’s equipment lease with an inception date of       ...

1. The following information relates to B&B, Inc.’s equipment lease with an inception date of

       January 1:

  • Fair value of equipment at lease inception, $114,000
  • Lease term, 4 years
  • Economic life of property, 5 years
  • Implicit interest rate, 7%
  • Annual lease payment due on December 31, $32,000
  • Present value of the minimum lease payments, $100,883

The equipment reverts back to the lessor at the end of the lease term.

How much is interest expense on the lease for the first year?

  1. $5,116
  2. $7,062
  3. $6,653
  4. $4,920
  1. B&B Company acquired a truck that cost $110,000. The company estimated it could sell the truck for $15,000 at the end of its estimated useful life of 5 years.

How much is the gain or loss on the sale if straight-line depreciation is used and the asset is sold for $56,200 on December 31, Year 3?

  1. $15,200 loss
  2. $16,800 loss
  3. $17,000 gain
  4. $10,200 gain

Solutions

Expert Solution

1)Correct option is "B" -7062

Interest expense for year 1 =Present value of minimum lease payment * implicit rate

                        = 100883*7%

                         = 7061.81 (rounded to 7062)

2)Correct option is "None of options provided are correct.

Depreciation expense per year = [Cost-salvage value ]/useful life

                     = [110000 - 15000 ]/5

                     = 95000/5

                    = 19000

Accumulated depreciation for 3 years = 3*19000 = 57000

Book value at end of year 3 = cost-accumulated depreciation

                          = 110000 -57000

                          = 53000

Gain /(loss) on sale =sale value -book value

                      = 56200 -53000

                       = 3200 Gain

ekkarill92 answered 1 year ago
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