On January 1, 2004, Digital, Inc. leased heavy machinery from Young Leasing Comp

Question

On January 1, 2004, Digital, Inc. leased heavy machinery from Young Leasing Company. The terms of the lease require semi-annual payments of $20,000 every six months for ten years beginning on June 30, 2004. The annual interest rate on the lease is 20%, compounded semi-annually. Assume the lease qualifies as a capital lease. Calculate the amount of interest expense reported on Digital's 2004 income statement related to this lease. Enter your answer with two places after the decimal point (i.e., $12,345.67). You will need to use the time value of money factors posted on carmen to answer this question.

Explanation / Answer

Number of semiannual months = 10 *2 = 20

semiannual interest rate = 20/2 = 10%

Amount of lease = PVAF@10%, 20 * Annual payment

                                = 8.51356 *   20000

                                 = $ 170,271.27 (approx 170,000 )

Interest expense = $ 33756.97

DAte Lease at beginning (A) Interest B = (A*.10) Payment(c) Principal D= (C-B) lease at end (A-D) 30 june 2004 170,271.27 17027.13   [170271.27*.1] 20000 2972.87 [20000-17027.13] 167298.4    [170271.27-2972.87] 31 DEC2014 167298.4 16729.84 20000 3270.16 164028.24 33756.97

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