On January 1 2020 Dean Corporation signed a tenyear noncance

On January 1, 2020, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $150,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,006,512 at an effective interest rate of 8%, with respect to this financing lease, Dean should record for 2020 Select one: a. lease expense of $150,000. b. interest expense of $80,521 and amortizaton expense of $67,101. c. interest expense of $67,101 and amortization expense of $57,102 d. interest expense of $68,522 and amortization expense of $100,652.

Solution

Correct answer is B

		8% Effective interest	Decrease in	Outstanding
Date	Payment	Balance	balance
				1006512
12-31-2020	150000	80521	69479	937033
12-31-2021	150000	74963	75037	861996
12-31-2022	150000	68960	81040	780955
12-31-2023	150000	62476	87524	693432