Question

19

On January 1, 2021, Company Aleased equipment from Company B under a 3 year lease agreement. Company A accounted for the lease as a finance lease for $420,000 which includes a $25,000 purchase option at the end of the lease. Company Ais reasonably certain to exercise the purchase option. Company A estimates that the equipment's fair value will be $6,000 at the end of its 4-year life. For the year ended December 31, 2021, what amount should Company A recognize as amortization expense on the leased asset? $103,500 $140,000 $138.000 $105,000

Answer 1

Solution

Amortization expense = (Total cost of the asset - Salvage value)/ Useful life of the asset

Since in the given case, Company A is reasonably certain to exercise the purchase option, the amortization expense is calculated over the useful life of the asset instead of lease term.

Therefore amortization expense

= ( $ 420000 - $ 6000) / 4

= $ 103500