On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a
ID: 2490868 • Letter: O
Question
On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%. In its 2015 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?
a. $200,000
b. $160,000
c. $120,000
d. $80,000
Answer of D is given but need to show work.
Explanation / Answer
Answer
On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease.
Hernandez treated this transaction as a capital lease. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%.
So heavy duty drill press will be recorded in books of Hernandez at $1,200,000.
The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets.
So Depreciation of leased heavy duty drill press = $1,200,000 / 15 years
= $ 80,000
Answer : d. $80,000
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