Use the Following Information for Questions 104 and 105

question 26

Multiple Choice

Use the following information for questions 104 and 105.
On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%.
-In its 2015 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?

• A) $200,000
• B) $160,000
• C) $120,000
• D) $80,000

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