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ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a finance lease. The cost of the asset is $122,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would Best record as annual amortization

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Answer: $12,200

Explanation:

Amortization allows for the cost of an asset to be distributed across its useful life:

Annual Amortization using the straight-line method is:

= (Cost of asset - Residual value) / Useful life

As there is no stated residual value, we shall assume there is none.

= 122,000 / 10

= $12,200

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