With a lease commencement date of January 1, 2019, Emgrand Company leases equipm

Question

With a lease commencement date of January 1, 2019, Emgrand Company leases equipment with a fair value of $625,000 to Bolero Company under the following terms Lease term Annual rental payable at beginning of each year Useful life of equipment Bolero's incremental borrowing rate Implicit interest rate in lease (known by Bolero) Present value of annuity of $1 in advance for 3 periods at years $200,000 5 years 6% 8% 2.8334 2.7833 6% 8% Emgrand routinely leases equipment of this nature. Bolero has no other leased equipment. Neither entity considers the 3-year term to be a major part of the asset's 5-year life. Nor do they consider the present value of the lease payments to be substantially all of the fair value of the asset. Considering only the above information, what amount of total lease expense should Bolero report in its December 31, 2019 financial statements? Multiple Choice $400,000 $188,893 $200,000 $185,553

Explanation / Answer

Correct answer is Option C i.e. $200,000

Because it is an operating lease, hence only lease payment would be recognized as lease expense. Term of lease is less than useful life of the asset which states that the lease is operating in nature.

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