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Steam Co. acquired equipment under a finance lease for 6 years. Minimum lease payments were $60,000 payable annually at year end. The interest rate was 5% with an annuity factor for 6 years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease

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segehood

Answer:

$15,227

Explanation:

Leases are capitalized when present value of lease payments is 90% or more of the fair value.

Now, given that

Minimum lease payments = 60,000

Annuity factor = 5.0757

Capitalized lease liability at inception = 60,000 × 5.0757

= 304,542

Therefore,

Interest expense at end of first year lease = interest rate × capitalized lease liability

Where

Interest rate = 5%

Thus,

0.05 × 304542

= $15,227

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