Question

On January 1, 2021, Harrington, Inc. signed a 10-year noncancelable lease for a heavy duty drill press from Jones Equipment Inc. The lease stipulated annual payments of $260,000 starting at the beginning of the first year, with title passing to Harrington at the expiration of the lease. Harrington treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Harrington uses straight-line amortization for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,668,591, based on implicit interest of 9%. In its 2021 income statement, what amount of amortization expense should Harrington report from this lease transaction

Answer 1

Answer: $126,773.19

Explanation:

First the $260,000 must be subtracted from the present value.

= 1,668,591 - 260,000

= $1,408,591

This was done because the $260,000 was paid in the beginning of the year and has thus reduced the liability.

The amortization expense will therefore be,

= 1,408,591 * 0.09

= $126,773.19

In its 2021 income statement, Harrington should report $126,773.19 as amortization expenses.