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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

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 theLeased assetLeaseTerm×6months12months=$3,165,00010Years×6months12months=$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:

Interestexpense=[(LeasepayableInitia

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