Textbook Problem

Fox Company, a dealer in machinery and equipment, leased equipment to Tiger Inc. on July 1, 2019. The lease is appropriately accounted for as a finance lease. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2029. The first of 10 equal annual payments of $500,000 was made on July 1, 2019. Fox had purchased the equipment for $2,675,000 on January 1, 2019, and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2019, of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000.

Refer to the information for Tiger Inc. above. Assuming that Tiger uses straight-line amortization, what is the amount of amortization and interest expense that Tiger should record for the year ended December 31, 2019?

1. a. $158,250 and $159,900
2. b. $158,250 and $189,900
3. c. $168,750 and $159,900
4. d. $168,750 and $189,900