On January 1, 2018, JJ Corporation signed a six-year noncancelable lease for equipment. The terms...
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On January 1, 2018, JJ Corporation signed a six-year noncancelable lease for equipment. The terms of the lease called for JJ to make annual payments of $180,000 at the beginning of each year for six years with title passing to JJ at the end of this period. The equipment has an estimated useful life of 8 years and no salvage value. JJ uses the straight-line method of depreciation for all of its fixed assets. JJ accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 9.5%.
With respect to this capitalized lease, for 2018 JJ should record
a.
interest expense of $54,205 and depreciation expense of $93,822.
b.
interest expense of $51,352 and depreciation expense of $93,822.
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