2

At the beginning of Year 1 (Jan 1st), Marvel Co. entered into a 10 year lease for a new piece of equipment. Per the lease terms, Marvel Co. must make yearly $100,000 payments, occuring at the end of the year, for the entire lease term. Title of the equipment will transfer to Marvel Co. at the end of the lease period. Accordingly, Marvel Co. accounted for this lease as a "finance lease". The equipment has an estimated useful life of fifteen years and is estimated to not have any residual value. Marvel Co. uses the straight line method for depreciating all of its PP&E. The payments under this lease are determined to have a PV of $671,008 considering an 8% effective interest rate. Further, it was determined that the FV (fair value) of the equipment on Jan, Year 1, was $674,000. For the year ending December 31, Year 1, with respect to this lease, Marvel Co. should report: O a. lease expense of $53,920, and depreciation expense of $44,734. O b. interest expense of $53,920 and depreciation expense of $44,933. O c. interest expense of $53,681 and depreciation expense of $44,734. Od interest expense of $53,681 and depreciation expense of $67,101