On January 1, 2014, O'Connor Construction Signed a Lease for a Machine

question 25

Multiple Choice

On January 1, 2014, O'Connor Construction signed a lease for a machine for $15,000 per year for 8 years.The first payment is due on December 31, 2014.The lease covers 80 per cent of the asset's useful life, and O'Connor expects to keep the asset till the end of the lease.If O'Connor had borrowed money to buy the machine, they estimate the interest rate would have been 8%.The expense that would be recorded for the lease on the income statement in 2014 is closest to?

• A)$6,896
• B)$8,620
• C)$15,000
• D)$15,516

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Definitions:

Annual Fixed Costs

The total of all business expenses that are consistent and unchanged throughout the fiscal year, regardless of production levels or sales volume.

Contribution Margin

The contribution margin represents the portion of sales revenue that is not consumed by variable costs and contributes to covering the company's fixed costs.

Depreciation Expense

A technique in accounting for distributing the expense of a physical asset across its usable life.

Fixed Costs

Expenses that do not change with the level of activity or output over a short period, such as rent, salaries, and insurance premiums.