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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 20, Problem 5MC
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Chapter
Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
Problem 1RE
Problem 2RE
Problem 3RE
Problem 4RE
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Problem 7RE
Problem 8RE
Problem 9RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
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Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
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Problem 1P
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Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
Problem 6C
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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

To determine

Identify the amount of amortization and interest expense that Incorporation T should record for the year ended December 31, 2019.

Explanation

Amortization: Amortization is a process in which the cost of intangible assets is spread equally over the limited or definite useful life of asset.

Compute the amortization amount:

Amortization expense = Present value of the Leased assetLease Term × 6 months12 months= $3,165,00010 Years × 6 months12 months= $158,250

Interest: Interest is the amount charged on the principal value, for the privilege of borrowing money. Interest is to be paid by the borrower, and to be received by the lender.

Compute the interest expense:

Interest expense = [(Lease payable − Initia

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