Question
Alt Corporation entered into an agreement with Yates Rentals Co. on January 1, 2025 to lease a machine to be used in its manufacturing operations.
Alt Corporation entered into an agreement with Yates Rentals Co. on January 1, 2025 to lease a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2025, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. d) Alt's incremental borrowing rate is 10% per year. Alt does not know the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit that is sufficiently material to make collectibility of future lease payments doubtful.
If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2025?
a. Amortization expense and Interest expense of $574,864 b. Lease Expense of $574.864 c. Amortization expense of $574,864 d. Interest expense of $574,864
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