Happy Corporation Leased a Building from Sensor Company

question 123

Multiple Choice

Happy Corporation leased a building from Sensor Company.The 10-year lease is recorded as a capital lease.The annual payments are $10,000 and the recorded cost of the asset is $67,100.The straight-line method is used to calculate depreciation.Which of the following statements is true?

• A) Depreciation expense of $6,710 will be recorded each year.
• B) Depreciation expense of $10,000 will be recorded each year.
• C) No depreciation expense will be recorded by Happy Corporation.
• D) No interest expense will be recorded by Happy Corporation.

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Definitions:

Present Value Factors

Present Value Factors are numerical values used to calculate the present value of a future sum of money or stream of cash flows given a specified rate of return.

Annual Lease Payment

The total amount of money required to be paid each year under the terms of a lease agreement.

Direct Financing Lease

A type of lease where the lessor effectively finances the leased asset, and the lease payments are structured to cover the original cost plus a profit margin.

Sales-Type Lease

A lease agreement where the lessor earns interest income over the lease term, treating the transaction like a sale.