On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease fo

Question

On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $150,000 at the beginning of each year for five years with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder appropriately accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $625,479 at an effective interest rate of 10%.

In 2015, Sauder should record interest expense of

Explanation / Answer

Interest expense in 2015 = (625479*(1+10%)-150000)*10% = $53802.69

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